Do you invest in gold? Why have you invested in gold or chose not to invest in gold? Is now the best time to invest in the precious metal? Maybe, maybe not.
Financial markets have experienced high volatility since the start of the year. In January, US stocks dropped around 10%, while oil dropped approximately 35%, before both recovered in March.
This was as dovish tones from the Fed pushed markets up and oil-producing countries stated that they would restrict the supply of oil. Despite, markets recovering at the end of the first quarter, most analysts agree that 2016 be challenging year for the financial markets, nonetheless.
Gold Price Investing
In difficult markets, investors tend to look at so-called ‘safe haven’ assets as a store of value. Examples of safe haven assets would be German government bonds, US treasuries, and the Swiss franc. However, probably the most popular safe haven asset is gold. This explains why the price of gold has seen such a steep increase since the beginning of the year.
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Year-to-date the price of gold has increased over 14% and gold has been one of the best performing asset classes so far this year. The price of gold is currently trading at around USD 1,224 per fine ounce, but many experts believe that there is still a lot of upside for the gold price in 2016.
Capital Economics analyst Simona Gambarini stated, regarding the drivers behind the rally in gold, that they are “a combination of safe-haven demand on the back of worries about China in particular, a scaling back of expectations of further rate hikes from the Fed, and rising inflation expectations.”
The price of gold is heavily affected by US interest rates, due to the opportunity cost of owning a known a non-yielding asset. As long as the Fed rate hike is pushed further down the end of the year, gold will most likely continue to rally.
Furthermore, any negative news coming out of China regarding its economic growth will likely rattle global stock markets and give the price of gold a further boost. As long as stock markets don’t recover and start rallying for a prolonged period for time, the most likely scenario will be a continuation of the current rally in gold.
Another contributing factor to the increase in gold price are rising inflation expectations. As the US economy is one of the few global economies that is currently growing at a reasonable rate, rising inflation expectations are back in the limelight. For many investors gold is seen as an inflation hedge, hence they have been putting money into the precious metal, to position themselves for a possible increase in inflation.
If you are actively managing your investment portfolio, then now could be a good time to allocate a small percentage of your investment capital into gold. As financial markets are facing a tough year ahead, due to US elections and uncertainty over the timing of the next Fed rate hike, increased volatility in the price of oil, a potential slow down in Chinese growth, geo-political trouble in the Middle East and sluggish global economic growth, putting 5-10% of your capital into the precious metal might be the right trade for 2016. Not only will gold be a good store of value, in case your holdings in stocks lose money, but, also, its price will likely rise in the current shaky market environment.
Furthermore, gold is also a great asset class to invest in for the purpose of portfolio diversification. This is because gold is generally negatively correlated to risky assets, such as stocks, due to its safe haven characteristic. If you are rebalancing your portfolio composition to better position yourself for a potentially turbulent 2016, then gold should without a doubt be part of your portfolio.
Do you invest in gold? Why have you invested in gold or chose not to invest in gold?