Our view on investing in gold has become more positive. As the risks of currency devaluation, stock market dislocation and US monetary policy failing to normalise loom, we see investing in gold as effective diversification away from the equity markets, where volatility is rising.
This rising volatility and the US Federal Reserve’s delay in raising interest rates have given gold a boost. The interest rate hike delay resulted in a rally in bond markets and a subsequent fall in real yields. As gold isn’t an income producing asset, and income yields have fallen, the opportunity cost of holding it isn’t as high as it once was. The delay in raising rates also resulted in a fall in the dollar (although this is relative to mainstream currencies).
Some might say that this is the beginning of gold’s renaissance. However, for true enlightenment to happen there will need to be a shift in investor perceptions similar to the one that occurred three years ago. A few possibilities may contribute to such a development. Firstly, a change in inflation expectations would resurrect gold’s role as a store of value. This doesn’t yet seem to be happening, however some do see high inflation and currency debasement as Quantitative Easing’s ultimate end game. Similarly, another battle in the global currency wars could add to gold’s attraction. For instance, Chinese investors may find gold more attractive, due to the competitive devaluation of the yuan.
The investment landscape’s risk profile would also need to change at a structural level. It could be argued that the burst bubble in the Chinese stock market, and its potential knock on effect globally, has tilted this risk profile towards gold’s favour. Further, the prospect of monetary policy failing to normalise towards pre-2008 levels could also alter perceptions of gold – in 2013, it was believed monetary policy might start to normalise. Fast forward to 2015 and the Federal Reserve has delayed an interest rate rise and acknowledged that external events and market volatility now fall under its remit. If normalisation now looks less likely, then a shift in perception towards gold could be more permanent.
Subsequently we view holding gold as an effective strategy to limit risk. We believe that it would be logical to have direct physical exposure to gold, because any movement in its price will be directly reflected in the value of such a holding (however, physical gold is priced in US dollars rather than sterling, so is sensitive to exchange rate fluctuations). We have recently upgraded the rating of the ETFS Physical Gold exchange-traded commodity to three stars – we believe it offers a simple and cost-effective way of accessing the physical gold market.
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