Gold is back in Vogue

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  2020 has been an encouraging year to be a gold investor. The commodity price has risen dramatically on the back of a negative backdrop of the coronavirus and the collapse in the oil price. In recent weeks gold crossed as high as $1,700 an ounce, hitting its highest level in over seven years. It has since retreated, but most investors would be happy with gold’s return when compared with other asset classes. As we entered the year, stock market valuations had looked expensive when measured against most conventional metrics, and institutional investors became increasingly concerned about how much life was left in the current bull market. So, when COVID-19 and geopolitics (Saudi Arabia and Russia fighting over oil supply) combined to change market sentiment, equities spiralled into a bear market. That set the scene for gold. Investors have as a result been adding gold to their portfolios to hedge an increasingly volatile environment. Oddly, the rise in the gold price has happened despite inflation remaining subdued. Inflation has traditionally been a reason why investors revert to the commodity. Saying that, as a “state of the world” investment, investors have recently flocked to it. One thing that has worked in gold’s favour is the recent behaviour by the US Federal Reserve (Fed). On the back of growing concerns about the impact of COVID-19 on the global economy, the Fed announced its first emergency rate cut of 50 basis points, bringing the Fed funds rate down to a 1-1.25% range. Then the Fed cut again, taking rates down to a 0-0.25% range. Treasury bond rates followed suit, with the 10-year note falling well below 1%, hitting an all-time historical low. This worked in gold’s favour. As a non-yielding asset, gold’s relative appeal has risen within the low interest rate and very return world. The unscheduled rate cuts are not unprecedented. The Fed cut rates by 50 basis points in January 2008 in between meetings as issues surrounding the US housing market started to mount. The difference then was that we were coming from a rate above 4%, supporting the potential for further future cuts. This time around, the Fed has less to work with. It may mean the central back resorts to alternative policy tools. This could also be supportive for gold – a world in crisis is a world that works for gold investment. And after an initial positive burst on the news of the cut, the US stock market gave back its gains as the day progressed. In contrast, the gold price held its nerve. The state of politics in Europe also provided support for gold, with growing concerns about the rise of populism driving safe haven interest. These all add to inherent risks in the market that investors have factored in. Risks are escalating across global markets, and there’s more than a hint of bubble tendencies bursting in several asset classes. Nowhere has this been highlighted more than within the cryptocurrency space, which at one time had been marketed as “digital gold”. Gold could benefit from ongoing volatility seen in Bitcoin, its lack of stability, and the trouble many investors have had in cashing out their holdings. An additional positive development within the physical market is the continued rise in retail investment, particularly comprising a dramatic rise in the Middle East, plus notable demand from India and China. Given that emerging markets make up the bulk of physical gold demand, increasing demand driven by their growing middle classes is likely to support the commodity. Gold perhaps has been a victim of its success. During times of crisis it often becomes a source of liquidity. This was likely seen recently on the back of equity market weakness. The quick, sharp, sell-off seen in recent weeks would have resulted in investors getting margin calls, requiring liquidity sourcing from liquid assets like gold. Ultimately, gold has proved its portfolio value in recent months. Risk Warning DisclaimerAlthough the author and publisher have made every effort to ensure that the information in this publication was correct at press time, the author and publisher do not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause. Investments can go up in value as well as down, so you could get less than you invested. This Information does not constitute personal advice and you should speak to your financial advisor before committing to any pension product. Information in this document is for reference use only and its accuracy cannot be guaranteed and is subject to change.