Why record-high gold prices aren't scaring away first-time investors

By Myra P. Saefong

Who doesn't like a 'diversifier to stocks that is going straight up?' portfolio manager says

Gold futures topped $4,000 an ounce Tuesday for the first time ever.

Investor interest in gold has stayed strong, with increasing numbers of first-time buyers, despite record-high prices for the precious metal that topped $4,000 an ounce on Tuesday.

Gold has rallied even as the U.S. stock market is trading near all-time highs. That suggests that investors are hedging record-high equities with record-high gold, but there's a "growing element of hot money driving both markets, too," Adrian Ash, director of research at BullionVault, told MarketWatch by email.

On Tuesday, gold for December delivery (GC00) (GCZ25) climbed to never-before-seen heights, trading as high as $4,014.60 an ounce on Comex. It rose 0.7% to settle at at $4,004.40. Based on the most-active contract, prices are nearly 52% higher year to date, according to Dow Jones Market Data.

In 20 years of operation, BullionVault, a London-based precious-metals marketplace, has never been busier except in the "all-out crises" of 2008, 2011 and 2020, Ash said in written commentary.

"Lehman's crash, Europe's debt crisis and the COVID lockdowns were clear and immediate emergencies, spurring huge demand for gold," he said. "This year's gold rush, in contrast, comes without any panic in the wider financial markets."

Read: Why this veteran investor sees gold hitting $7,000 by the end of Trump's term

BullionVault in September reported that its Gold Investor Index, which is a measure of private sentiment derived from actual trading behavior, rose 1 point from August's seven-month low to a reading of 54.9, the strongest since June's four-year high. The index would read 50 if buyers and sellers of gold balanced each other out exactly.

Gold buyers outnumbered sellers in September, according to BullionVault's Gold Investor Index.

In September, BullionVault saw the most new account openings since August 2020, with the number of first-time investors rising 87.6% from the previous month. That figure more than tripled from September last year, rising 213.5%.

Where to next?

When it comes to gold, "put simply, demand is greater than supply," said Jerry Prior, chief operating officer and senior portfolio manager at Mount Lucas Management.

While the fundamental case for gold is strong, with a dovish Federal Reserve and a "weaponization" of the U.S. dollar leading to central-bank buying and deficit concerns, recent gains for the metal appear to be more flow- and retail-driven, he told MarketWatch.

Fear of missing out and gold potentially serving as a 'diversifier in a toppy stock market' have contributed to the rise - and 'who doesn't like a diversifier to stocks that is going straight up?' Jerry Prior, Mount Lucas Management

Fear of missing out and gold potentially serving as a "diversifier in a toppy stock market" have contributed to the rise - and "who doesn't like a diversifier to stocks that is going straight up?" said Prior.

Still, he warned: "Buyer beware."

See: Billionaire Ken Griffin warns on consequences of gold's rally as Goldman targets nearly $5,000

Also read Mark Hulbert: Gold's rallying on borrowed time. That could mean contrarians get the last laugh.

Where gold goes from here will be "data dependent," Prior said, adding that like the stock market, the gold market is going to need continued news and data support to drive prices to the next level.

"That could come with a weaker economy, giving room to a far more dovish Fed, or political jawboning to get the Fed more dovish," Prior said. "That could come with a lengthy government shutdown, increased deficit concerns - maybe tariff-revenue challenged, or lowered via trade deals - leading to loss of control of the back end of the Treasury curve. Or it could come from a more hawkish trade policy [and] weaponization of the dollar."

Read: What the dollar's retreat from global dominance means for investors as gold hits new records

Those are the conditions, he said, needed to drive gold prices up beyond $4,000 and potentially to $5,000. "Retail demand won't get it there on its own."

In terms of price action in the short run, however, Michael Armbruster, co-founder and managing partner at futures brokerage Altavest, said that "anything is possible."

"We remain long-run bulls, as ongoing central-bank purchases of physical gold, money printing and emerging investment demand are all central to our bullish thesis," he told MarketWatch.

He said Altavest would not attempt to pinpoint a top at $4,000 but is interested in adding to its long position on a "more substantial correction, if we get the opportunity."

Hedging year-to-date gains is a good idea at current levels, Armbruster said.

At the Greenwich Economic Forum in Greenwich, Conn., Bridgewater Associates founder Ray Dalio said investors should allocate as much as 15% of their portfolios to gold. That's more than the usual 5% to 10% recommended by most financial experts.

Gold is the one asset that does very well when typical parts of a portfolio go down, Dalio said.

But Mount Lucas's Prior said that a better opportunity may lie in "rebalancing back to target." Rebalancing is a "far greater compounder of wealth than tactical calls to increase investment in non-income-producing assets" such as gold, he said.

-Myra P. Saefong

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