- Hedge funds are betting on gold as a way to maximize returns during the unprecedented monetary and fiscal stimulus.
- But James Richman, chief executive and chief investment officer at JJ Richman said: "Gold needs to take a breather and pull back a little lower first before we can talk about any continuous rising from this point."
- Analysts point out that the fundamentals for gold have not changed and the exuberance may wane.
- Track the price of gold live here.
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Markets are betting on gold prices will rise as bond rates hit rock bottom following weeks of monetary and fiscal intervention, but analysts warn investors to "take a breather" from the precious metal.
Elliott Management, Caixin Associates, and Dymon Asia Capital are some of the funds to bet on gold so far in 2020.
Gold's price is up 11% year-to-date, according to Markets Insider data.
James Richman, chief executive and chief investment officer at JJ Richman told Markets Insider: "Gold needs to take a breather and pull back a little lower first before we can talk about any continuous rising from this point."
Reflecting the enthusiasm for gold, Paul Singer's New-York based Elliott Management, which manages about $40 billion in assets, believes that it was "one of the most undervalued" assets available. In a letter to clients last month, he said its fair value is "multiples of its current price."
But analysts told Markets Insider that markets are too optimistic about the precious metal and the outlook remains uncertain.
Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said gold prices took "investors on a wild ride"' during the great financial crisis.
"Leading up to and during the Financial Crisis, from 2007 to 2009, the price of gold took investors on a wild ride – running up some 30% from mid-2007 to early 2008, only to fall back down around 25% throughout the spring and summer of 2008, and finally to regroup and hit all-time highs later in 2009."
He added: "Currently, what's behind a lot of gold's rise is actually the collected enthusiasm and optimism around it, not necessarily its intrinsic fundamental drivers."
Why gold is not as promising as it looks
Many analysts forecast an increase in gold prices in the coming months as a result of the coronavirus pandemic. Bank of America forecasted in April that prices could almost double to $3,000 by the end of 2020, while UBS said last week gold could gain 5% more from current levels.
Ma said annual compound returns of gold for the last 100 years have been about 1.7% a year, which is low given ETF costs or storage costs are likely to be higher.
Robert R. Johnson, professor of finance at Heider College of Business, Creighton University, said: "Gold and silver are speculative investments, based on the Greater Fool Theory. The price of gold is not determined by its intrinsic value but simply by its expected selling price to someone in the future."
He cited comments by billionaire famed investor Warren Buffett that for $9.6 trillion, you could buy all the gold in the world, and it would fit into a nice cube inside of a baseball field diamond.
"For that much money, one could buy all the crop land in the United States, purchase 16 Exxon Mobils, and have about $1 trillion of walking-around money left over," Johnson said echoing Buffett's rationale.
Johnson added: "Once the coronavirus pandemic subsides, investors will likely sell off some of their gold holdings. While there are some 'gold bugs' that will cling to their gold investments, once fear subsides, the price of gold will likely fall," he added.
Richman said: "Right now, I'd put more money into defensive stocks such as GE (General Electric), which will soon show signs of recovery and will yield actual returns, not just preserve your assets during the current conditions."
How actions by the Fed affect gold prices
The Fed announced a $2.3 trillion package on April 9 to bolster lending and expand its corporate debt purchases.
Buying corporate debt usually reduces relative yields and lowers the opportunity cost of holding gold.
"While printing money, as the Federal Reserve is doing, will often cause a country's currency to fall, most of the world's major central banks are doing the same so on a relative basis the U.S. dollar is no worse-off and remains the world's reserve currency," said Gregory Leo, chief investment officer and head of global wealth management at IDB Bank.
He added: "Obviously, there will be pockets of supply disruptions and demand pressures but overall, we do not see inflation a near term problem and therefore do not see a reason to rush into gold."
John La Forge, head of real asset strategy at Wells Fargo Investment Institute, said: "Gold is a commodity, and commodities run together like a family in long super-cycles (bull and bear).
"Right now, commodities remain in a bear super-cycle that began in 2011. I believe that it could still be a few years until commodities enter their new bull super-cycle."
Oil prices have faced intense upside and downside volatility over the last month. US oil prices turned negative for the first time in history over a fortnight ago, due to lack of storage space, and lower demand for the fuel as economic activity has taken a beating during the pandemic.
"Until that bear switches to a bull, gold's upside will be held back," La Forge added.
Gold was down 1.4% at 1,683.35 per ounce as of 1:52 p.m. ET Thursday.
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