Tuesday 17 March 2020 4:36 am

DEBATE: Is now a good time to invest in gold?

Monica Tepes is investment companies research director at finnCap.
Edward Park
Edward Park is deputy chief investment officer at Brooks Macdonald.

Is now a good time to invest in gold?

Monica Tepes, investment companies research director at finnCap, says YES.

Now is a good time to buy gold if you believe that we are in the early stages of an economic crisis or in a prolonged period of low economic growth. 

In a risk-off environment and with ultra-low interest rates, demand for gold can rise dramatically, as many investors turn to it as a store of value or portfolio hedge.

Gold performed extremely well during the last financial crisis, tripling in value between 2008 and 2011 while equity markets were still in recovery. And, just like gold was weak over the last couple of weeks, the precious metal was also weak in the initial stages of the last financial crisis — possibly because it got caught, then and now, in the initial liquidity squeeze of the crisis.

Adding to the bull argument for gold is the constrained supply for the metal. Reserves in the ground have been declining after exploration, and development of new projects have been cut back in recent years. 

Edward Park, deputy chief investment officer at Brooks Macdonald, says NO.

Gold is an inherently difficult asset to value as the marginal demand comes from investors rather than an outside factor that conforms to traditional economic models. As a result, investors look at two alternative models.

Some look to bonds, as investors could buy bonds instead of gold for the defensive part of their portfolio. As more debt has negative yields, the attractiveness of gold, which has no yield, increases. The second group says that gold is the ultimate inflation hedge and therefore should be bought to protect against prices rising

Despite the aggressive action by central bank to cut interest rates, the yield on global debt has actually risen as investors price in an increased chance of corporate defaults. At the same time, inflation expectations have fallen sharply as markets price in a recession risk.

Both of these factors have weighed on gold recently, and with the markets still struggling to find a fair level, we expect gold to remain under pressure. 

Main image credit: Getty

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