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Digital gold or physical bitcoin?

What’s behind the bull market in bullion?
Duncan MacInnes
Fund Manager

In the first week of March, amidst much fanfare, the Nikkei, the Nasdaq and bitcoin (digital gold to its devotees) all soared to new highs. 

But the bull market fewer people are talking about is the one in actual gold. It has also reached a new high in dollars of $2,150 per ounce and is trading at all-time highs in every other currency. So what’s behind the ascent? Perhaps it’s not so much that these assets are going up, but that fiat money is going down. 

In recent weeks, we have increased our exposure to silver and gold equities, amounting to around 7% of the portfolio.

If you wanted one asset to express Ruffer’s long-term view – concerns about financial stability, inflation volatility and financial repression – gold might well be it. And, despite the new nominal highs, gold is still around 50% below its inflation-adjusted price peak in 1980. 

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Remarkably, gold has achieved its new high despite huge outflows from exchange-traded funds (ETFs) of around 30 million ounces or $60 billion, as this month’s chart shows. That tells you this gold bull market isn’t being powered by retail investors, wealth managers or advisors. A recent Bank of America survey found that 75% of advisors had less than 1% of their portfolios in gold and less than 10% were considering increasing their positions, the lowest interest since 2017. Instead, these types of investors have preferred the allure of the new bitcoin ETFs. At roughly $60 billion, these funds have grown (in the space of a couple of months) to about half the size of the gold ETFs, which have been around for 20 years. 

So who has been buying gold?

Precious metals have three types of buyers: central banks and emerging market savers; investors; and jewellers. Forget jewellers, the first two move the price. Since the full-scale invasion of Ukraine, central banks and emerging market savers have been mega buyers of bullion, but they don’t buy ETFs or stocks. Meanwhile, as interest rates rose, gold came to look expensive relative to the dollar, real yields or cash rates, so investors have not been buying, leading to outflows from ETFs and miners. 

But perhaps that’s the wrong thing to focus on. Are we in fact in a new era of price insensitive, strategic buyers taking ounces out of the market which will never return? Foreign central banks are not trading gold for a 10% move, they are fundamentally underpinning their currency and diversifying away from US Treasuries. The western banking system could be a dangerous place for anyone who might one day be deemed a bad actor by capricious authorities – much safer to have bullion where you can access it. 

This is a bull market nobody cares about… yet. In particular, gold equities have become an investment backwater, down 5% year to date and 53% from their highs of 2011 or 35% below the highs of 2021. They are shunned due to a history of poor capital allocation and ESG concerns. As a result, US listed miners have a combined market cap of some $250 billion, around the same as Nvidia rose in one day the last time it reported earnings. Listed miners’ valuations are attractive and the stocks are naturally leveraged to a rising gold price. 

If investors, spotting the sea change and the price momentum, now jump on the bandwagon – because interest rates come down, inflation goes back up or crypto goes pop – you could see fireworks. 

Come the next crisis, if the monetary mandarins reach for the printing press again, few investors will feel they have enough gold.

Duncan MacInnes
Fund Manager
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A golden ticket?
January 2024: 2022 revealed the importance of asset correlations for investors trying to build resilient portfolios. When both equities and bonds fell together there were few places to hide. But as markets cheered falling inflation last year, that crucial lesson has become all too easily forgotten. This month’s Green Line looks at why inflation volatility matters most in this new investment regime and suggests investors may just have been offered a golden ticket out of trouble.
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Source: Bloomberg, data to March 2024.

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. References to specific securities are included for the purposes of illustration only and should not be construed as a recommendation to buy or sell these securities. This article does not take account of any potential investor’s investment objectives, particular needs or financial situation. This article reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. This financial promotion is issued by Ruffer LLP which is authorised and regulated by the Financial Conduct Authority in the UK and is registered as an investment adviser with the US Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training. © Ruffer LLP 2024. Registered in England with partnership No OC305288. 80 Victoria Street, London SW1E 5JL. For US institutional investors: securities offered through Ruffer LLC, Member FINRA. Ruffer LLC is doing business as Ruffer North America LLC in New York. Read the full disclaimer.

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London
Ruffer LLP
80 Victoria Street
London SW1E 5JL
Paris
Ruffer S.A.
103 boulevard Haussmann
75008 Paris, France
New York
Ruffer LLC
300 Park Avenue
New York NY 10022
Edinburgh
Ruffer LLP
31 Charlotte Square
Edinburgh EH2 4ET