Why Gold Isn’t as Safe as You Think

Gold, gold, gold – going up. It’s just gone through $4,000 in US dollar terms and $6,000 in Aussie dollar terms.

Let me just put the gold sector in perspective for you, just in case you feel as if you’re an idiot for not being in gold.

As far as the Australian market’s concerned, if you take the ASX 200, gold stocks make up about 2.5% of it. So most fund managers in Australia feel no pressure to hold gold or gold stocks.

If they were under pressure, they might just hold the big three in the ASX 200 – Evolution Mining, Northern Star, and Newmont – although the weighting is very small. Most fund managers would just hold them in a neutral weighting and forget about gold.

What’s happening in gold at the moment is it’s being written up everywhere. It’s getting a lot of media coverage, a lot of commentators are talking about it, and you’d get the impression this is the only story in the Australian stock market.

But it’s rather like being in a casino for eight hours and, over in one corner, there’s a massive party going on – everyone’s jumping up and down about how fantastic it is, everyone’s a winner in that corner.

You start to think you should abandon the main floor and head over there. That’s gold. It’s niche.

Yes, people have made loads of money on gold. Yes, it’s seen as a safe asset class. The risk-reward looked obvious – but you missed it.

So my message to you is don’t worry if you missed gold. From a stocks point of view, they’re small, volatile, and risky. You didn’t need to be in them.

As for the gold price itself, which you can access through gold ETFs – yes, maybe it was quite an easy theme this year in hindsight. But let me tell you, when it turns, it’ll turn fast.

What’s been driving it has been three – probably four – things.

The first is that interest rates are expected to go down. Gold has no yield; it competes with asset classes that do. If those asset classes yield less, gold becomes more competitive. So the idea is that gold goes up when interest rates go down – and they’ve started to go down.

The second driver has been central bank buying – probably the main one. The thinking is that there are fears about the US debt situation. Maybe not this year, maybe not in five years, but even if it’s in the next decade, countries with huge US bond holdings like Japan and China are starting to think about switching them into something else.

Gold is the obvious choice. So central bank buying of gold is a very strong underlying driver.

Ever since the US debt scare in April, after the tariffs were introduced, everyone started realising this really could go wrong. At some point, the US could lose access to the bond market – in which case, get out of bonds. That’s been driving gold.

Another factor is China building up its gold reserves. If they ever expect the yuan to become a reserve currency, it’ll need to be backed by gold. So they’re buying as well.

The next driver has been the drop in the US dollar. Anything priced in US dollars has, by definition, gone up about 12% this year because the dollar’s fallen about 12%. The weaker dollar is pushing the gold price up.

And finally, there’s exchange-traded fund demand for gold ETFs. Some gold ETFs actually buy physical gold to back investments. The more buyers there are for a gold ETF, the more demand there is for gold itself – and the higher the price goes.

Gold supply is tight. You can’t just pop it out of the ground hand over fist – it’s a slow process. So all sorts of factors are driving the gold price higher.

On the back of that, you might say, “I’ll just buy gold – it’s safe, it’s a store of value.” Let me tell you – gold goes down as well as up. Even central banks will pause their buying if they think the price is getting ahead of itself and they can get it cheaper later.

Short-term, what could halt the gold price?

If the US government shutdown ends – that could take pressure off gold.
If the US dollar starts to rise – that’ll drag gold down.
And if the share market tips over, it won’t matter what the asset is – people will sell, even gold ETFs, to get into cash.

So, be careful with gold. One – you don’t need it. Two – it’s right up there. Three – it’s not safe. It’s a commodity price, and it’s vulnerable.

Be careful out there.

That puts gold in perspective. If you haven’t bought gold, this is probably the middle of the boom – not the moment to start.