Gold has moved back into focus after its mid-year correction, supported by a softer US dollar, lower bond yields and continued central-bank demand.
Australians have responded quickly, with gold ETFs recording their largest month-on-month turnaround in net flows on record, moving from $253 million in outflows in June to $238 million in inflows in July.
The more important question is what the shift means for portfolios from here.
What’s changed?
Earlier this year, a stronger US dollar made it harder for gold prices to rise. That pressure has eased in recent weeks, helping support gold’s recovery.
Because gold is priced in US dollars, a stronger dollar makes it more expensive for overseas buyers, which can reduce buying interest.
Betashares Senior Investment Strategist Cameron Gleeson said the US dollar strengthened through the first half of the year as investors expected the US Federal Reserve to keep interest rates higher for longer, but that trend has stalled since late July.
“The US dollar remains an important swing factor. If the dollar continues to lose momentum, that should provide a more supportive backdrop for gold,” he said.
“The US dollar remains an important swing factor. If the dollar continues to lose momentum, that should provide a more supportive backdrop for gold,”
Unlike bonds, gold doesn’t pay interest or generate income. So when bond returns are higher, investors may be more inclined to hold bonds instead of gold. When those returns fall, gold often becomes a more attractive alternative.
Recent policy developments have also helped support gold. US Treasury Secretary Scott Bessent announced an increase in buybacks of longer-dated US government bonds1, which pushed bond yields and the US dollar lower, helping lift gold back above US$4,500 per ounce2.
Source: Bloomberg. You cannot invest directly in an index. Past performance and past valuation levels are not indicative of future performance.
What role can gold play in a portfolio?
When it comes to gold, the investment case isn’t just about where the price goes next.
Gold often behaves differently to growth assets such as equities, particularly during periods of market stress or uncertainty. Rather than being relied on to deliver the highest returns, its value often comes from adding a different source of return to a portfolio.
For someone with most of their portfolio invested in equities, introducing an asset that responds to different economic and market forces can help reduce reliance on sharemarket performance alone.
As retirement approaches, this type of diversification can become even more valuable, as recovering from large market declines becomes more difficult with a shorter investment horizon.
That doesn’t mean gold will rise every time markets fall, or that it should replace income-generating assets such as bonds. Its value is more likely to come from being one part of a broader asset allocation.
Structural demand remains important
While currencies and interest rates can dominate gold prices over shorter periods, the longer-term demand picture remains supportive.
Central banks continue to accumulate gold as they diversify their reserve holdings, while the broader trend towards de-dollarisation remains an important source of demand.
“The structural case for gold remains intact,” Gleeson said. “Continued central-bank buying and the broader trend towards de-dollarisation remain important sources of underlying support.”
“The structural case for gold remains intact. Continued central-bank buying and the broader trend towards de-dollarisation remain important sources of underlying support.”
Gold’s recent correction did not necessarily mean its longer-term drivers had disappeared. Instead, shorter-term macro forces temporarily worked against an asset that still has meaningful structural demand behind it.
What to watch from here?
Three factors remain important: the direction of the US dollar, movements in bond yields and whether central-bank buying remains resilient.
If those forces stay supportive, the backdrop for gold may remain constructive. If they reverse, volatility could return quickly.
For those reviewing their portfolios, the more useful question may therefore be less “where does gold go next?” and more “what job would gold do in my portfolio?”.
That could mean diversifying equity risk, adding exposure to a different set of market drivers, or providing another potential source of resilience during periods of uncertainty.
As Gleeson noted: “Taken together, a slightly weaker US dollar, continued central-bank buying and elevated policy and geopolitical uncertainty leave gold looking increasingly well supported.”
“Taken together, a slightly weaker US dollar, continued central-bank buying and elevated policy and geopolitical uncertainty leave gold looking increasingly well supported.”
Those looking to add gold to a diversified portfolio can access it through the QAU Gold Bullion Currency Hedged ETF . The fund is backed by physical gold bullion and is currency hedged, aiming to provide exposure to movements in the gold price while reducing the impact of fluctuations between the Australian and US dollars.
There are risks associated with an investment in QAU, including market risk, gold price risk and currency hedging risk. Investment value can go up and down. An investment in the Fund should only be considered as a part of a broader portfolio, taking into account your particular circumstances, including your tolerance for risk. For more information on risks and other features of the Fund, please see the Product Disclosure Statement and Target Market Determination, both available at www.betashares.com.au.