It’s time to hold gold, says Far East’s Warwick Grigor

• Far East Capital’s Warwick Grigor says gold producers among the best performers right now
• There are similar economics today as those in the 1970s with war, oil sanctions etc
• Real interest rates are negative at < 3% while inflation is greater than 8%

Gold gets the bulk of its value as a safe haven from inflation and tends to increase in value at times of geopolitical uncertainty.

That has come into stark focus twice over the past couple of years, as prices hit a record of US$2067/oz in August 2020 in the wake of the initial panic of the Covid-19 pandemic and swung close to that mark in March this year shortly after Russia invaded Ukraine and sparked Europe’s largest conflict in decades.

We’re yet to see gold hit levels of up to US$2500/oz some analysts projected in the wake of the Russian invasion, but at US$1,835.32/oz gold has largely held its value while equity markets and crypto have faltered in 2022.

So, if you’re wondering when you should hold gold, Far East Capital’s Warwick Grigor reckons now is looking pretty good – especially since gold producers are among the best performers in the market at present.

“Their performance has confirmed the view that gold is first and foremost a safe store of money,” he said.

“Gold is an insurance policy for your portfolio, more so than the speculative asset that many traders want it to be.”

It’s like the 1970s all over again

Grigor says there are strong parallels between our current economic conditions and those in the 1970s – namely war, oil embargoes and the acceleration of an inflationary cycle.

“Gold was a spectacular performer from 1971, when it came off the gold standard,” he says.

“Over the next decade it ran from US$35/oz to peak at US$850/oz as the move to a fiat currency gave central banks the unconstrained ability to create money and credit.”

Gold peaked at US$850/oz because interest rates were less than inflation, and then in 1981 the gold price fell until 2000 when interest rates were lifted above inflation rates and real interest rates became positive.

“Today, real interest rates are still very much negative at < 3% while inflation is greater than 8%. This is exactly the time you should own gold assets,” Grigor said.

“If real interest rates become positive e.g. 10% when inflation is only 8%, that is when you should exit gold.

“Will rates go this high? No-one is actually forecasting this, but it depends upon how well the central banks do this job in putting the inflation genie back into its bottle.”

Gold could soften in the second half

Metals Focus says gold could soften in the second half of this year, but will continue to perform better than equities.

With economies slowing and inflation stubbornly high, the risk of stagflation is growing, while other systemic risks abound.

This should continue to encourage many investors to diversify into gold, Metals Focus says.

“Even at our forecast $US1,670 trough in late 2022, gold will be only 9% lower than at end-2021,” it says.

“Against this we expect to see double-digit declines for equities, high yield bonds and very possibly also investment-grade bonds.

“Importantly, at $1,830 in 2022, our full year average gold price forecast is an all-time high.”

But while the price is looking fairly solid, producers are tightening their belts, with a swathe of production downgrades from the likes of  Evolution Mining (ASX:EVN) and OZ Minerals (ASX:OZL) citing labour and fuel expenses, Covid cases and supply chain issues.

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