Bank of America investment strategist Michael Hartnett called on investors to continue buying gold when the price is at an all-time high. In his report released last Thursday, Hartnett suggested that investors follow the central bank's approach, that is, "buy gold." He believes that although the Federal Reserve's possible interest rate cuts in the coming months may trigger an inflation rebound next year, physical assets such as gold usually perform well during inflation. Hartnett's views echo the recent performance of the gold market. So far this year, gold prices have soared by about 20%, not only surpassing the gains of the S&P 500, but also outperforming the performance of technology stocks. It is worth noting that despite the record price of gold, investors do not seem to be chasing gold on a large scale. In fact, there has been a net outflow of $2.5 billion in gold ETFs this year, indicating that some investors have chosen to take profits when gold prices rise.

Follow the central bank's footsteps and continue to increase gold holdings?

Most of the buying of gold does not come from ordinary investors. Hartnett pointed out that only large-scale purchases by central banks can explain the coexistence of new highs in gold prices and capital outflows. He specifically mentioned that the People's Bank of China became the largest gold buyer in 2023. According to the World Gold Council, global central banks purchased a record 483 metric tons of gold in the first half of this year, and this trend is likely to continue. Currently, gold accounts for a relatively low proportion of China and India's foreign exchange reserves, at 5% and 10% respectively, while in the United States and some Western European countries, gold accounts for as much as 72% and 70% of foreign exchange reserves.

Hartnett further emphasized the importance of gold as a reserve asset. He pointed out that gold is currently the world's second largest reserve asset, second only to the US dollar, and has a very low correlation with stocks. Based on this analysis, Hartnett recommended two gold ETFs that he considered to be "top funds": IAUM and GLDM.

How to choose a gold ETF?

When the global economy encounters challenges, such as inflation, currency depreciation or geopolitical tensions, gold, as a traditional safe-haven asset, usually shows better performance. In addition, the price of gold is usually denominated in US dollars, so when the US dollar depreciates, the price of gold tends to rise. This is because investors will seek to buy gold to hedge against the risk of currency depreciation, thereby pushing up the market price of gold. At the same time, when interest rates fall, the opportunity cost of holding gold also decreases. In a high-interest rate environment, investors may choose to invest their funds in assets that can generate interest, such as bonds or savings accounts. However, in a low-interest rate environment, the attractiveness of these assets decreases, and investors are more likely to turn to gold because it does not need to pay interest and can provide hedging and value preservation functions.

When choosing a gold ETF, you should consider factors such as tracking error, management fees, fund size, and fund structure. Here are two gold ETFs with low expense ratios and strong liquidity.

• SPDR Gold Trust (GLD): GLD is one of the largest gold ETFs in the world, providing direct exposure to gold prices. With an expense ratio of 0.4%, high liquidity, and the ability to closely track gold prices, it is suitable for investors seeking stable gold exposure.
• iShares Gold Trust (IAU): IAU is another popular gold ETF with low fees and holding physical gold. With an expense ratio of only 0.25%, the cost is relatively low and suitable for long-term holders.

Is gold still an asset worth investing in and hedging?

Despite Hartnett's optimism about gold, analysts are divided on whether it should be included in an investment portfolio. Conventional wisdom holds that since gold cannot generate new value and is difficult to value using modern financial metrics, its value calculation is often a matter of guesswork. However, gold supporters believe that it has unique value as a currency that is not controlled by any government, especially against the backdrop of the deteriorating fiscal situation in the United States. In addition, market expectations of lower interest rates in the coming months may also have a positive impact on gold prices.

Doug Ramsey, chief investment officer of The Leuthold Group, includes gold in his "all-asset no authority" permanent portfolio, holding a steady 14% of gold. This strategy reflects confidence in gold as a long-term store of value and hedging tool.

How to trade on uSMART:

After logging into the uSMART SG APP, click "Search" from the top right of the page, enter the target code, such as "GLD", and enter the details page to learn about the transaction details and historical trends. Click "Trade" in the lower right corner, select the "Buy/Sell" function, and finally fill in the transaction conditions and submit the order; the picture operation instructions are as follows:

Source: uSMART SG

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