Investors around the world put nearly £3bn into gold at the end of July in what was the second largest weekly sales figure for funds investing in the precious metal.
The figures, from Bank of America, were published as the gold price reached a record high of $2,070 (£1,555) per ounce, driven by investor caution and fears over inflation. Analysts expect the price to keep rising despite its ascent into uncharted territory.
Norman Villamin, of wealth manager UBP, said gold could be in the early stages of a “bull market” that could last several years.
He said: “Even with a vaccine, governments will need to spend money to reshape economies. This will provide a catalyst to investors to keep buying more gold and silver.”
He said American and European governments would ramp up economic stimulus in 2021 in order to avoid deflation, as Japan experienced after its interest rates hit rock bottom more than 30 years ago.
Inflation, or the fear of inflation, pushes the gold price higher as it reduces the buying power of traditional currencies such as the pound or dollar. Gold, on the other hand, can hold its value as there is limited supply.
Lower interest rates also affect the price of the precious metal. When the yields from cash or low-risk government bonds are high, the appeal for gold, which yields nothing, diminishes. The reverse is also true, and low or negative yields push safety-seeking investors towards gold, driving up its price.
The outlook for gold is linked to the strength of the dollar. A weaker dollar, as we have seen recently, tends to boost bullion, which is seen as a store of value. The American central bank is undertaking the world’s largest bond buying programme, which is expected to weaken its currency.
Investors also turn to gold as a safe haven when there is uncertainty around the economy. While gold was recording record inflows last week, Bank of America noted that around £1.5bn was taken out of stock markets, which are generally regarded as a riskier investment, while £4.2bn was moved into investments that mimic the returns of cash, the ultimate safe haven.
Tom Stevenson of Fidelity, a fund house, said gold would continue to rise if interest rates were cut to help propel economic growth and inflation rose at the same time. This is known as “stagflation” and was behind gold’s previous record rise in 2011.
However, he said it was possible that inflation never appeared or fears around coronavirus subsided once a vaccine was available. This would put the brakes on the gold price’s climb or even send it into reverse.
Investors can most easily buy gold via an exchange-traded fund. These track an index, aiming to match its performance for a modest fee. One option is the £10bn Invesco Physical Gold ETC. The fund costs just 0.19pc, making it attractive as high fees can eat into returns quickly.
Active funds can also offer exposure to gold, although they typically invest in a basket of several precious metals as well through gold-related stocks, such as miners. The £1.4bn Ruffer Gold and £1.5bn BlackRock Gold & General funds are two of the most popular, but they can be more volatile than simply buying the metal.