Gold is rallying - why?

Gold’s latest rally reflects a familiar mix: weaker US jobs data, shifting expectations for interest rates, geopolitical uncertainty and continued central bank demand. But after such a sharp move, I wouldn’t chase it. Gold produces no income and its price can be surprisingly volatile, so it is better viewed as insurance than as a core driver of portfolio returns.

For most investors, a modest allocation - around 5% - can provide useful diversification when core equity and bond markets misbehave. The simplest route is usually a physically backed gold Exchange Traded Fund (ETF) or Exchange Traded Commodity (ETC). Alternatively, gold mining shares or funds provide exposure, although they introduce equity and company specific risk. Physical bullion or coins offer direct ownership but come with storage and insurance costs. If buying from scratch today, I would phase the investment in over time.

Gold is rallying because investors are nervous and the old fear trade is back in fashion. Softer US jobs data, shifting rate expectations, inflation worries, central-bank buying and geopolitical risk have all helped push bullion towards record territory. But buying physical gold after a vertical run is not automatically prudent; at these levels, investors risk paying a panic premium for something that produces no income. For most long-term investors, gold is best treated as portfolio insurance, not a get-rich-quick trade. A modest allocation can help diversify, but the more interesting route may be quality gold miners. Unlike bullion, good miners can generate cash, reinvest, pay dividends and compound returns when margins expand. Gold bars just sit there looking expensive.

Gold isn't rising. Currencies are falling. That distinction is the whole story. Everyone blames this week's move on the weak US jobs number and nerves ahead of the inflation data. Those are triggers, not causes. The cause is decades of credit expansion that governments cannot stop and will not admit. Note who is buying, central banks now hold a larger share of reserves in gold than in US Treasuries, for the first time since 1996. They are voting with their reserves while savers still argue about entry points. Is now a good time? That's the wrong question. You don't time your insurance, you hold it. There are many ways to hold gold but if gold is money and everything else is credit, most portfolios hold far too little.

The more interesting number is that central banks bought a net 289 tonnes in the second quarter, the most ever recorded for a second quarter, in a quarter when the price fell around 16 per cent. They bought more than they have ever bought while it was getting cheaper. That tells you they are not trading gold, they are reallocating reserves, and price is not the variable they are solving for. Everyone arguing about entry points is playing a different game from the largest buyers in the market. I would also be careful with the framing that this is a record run. It is a recovery from a fall, not a new peak. For the business owners I act for, the question that matters is not what gold does next but how it is held.