Investors stockpile gold

Gold witnessed a series of events in the past week which ultimately proved fruitful for gold. Gold was highly influenced positively by a series of following key events:

1. Globally, equities markets plunged down sharply.
2. Uncertainties over the results of the U.S midterm, elections. At the moment there appears to be a strong chance of the Democrats gaining a majority in the House of Representatives, but the Republicans comfortably holding on to their Senate majority. Such a scenario would probably be gold-positive in that it would lead to political gridlock.
3. Trade war between China and US which was initiated by the implementation of tariffs on Chinese goods by the US governments
4. Uncertainty in Europe over the fallout from a possible no-deal scenario for Brexit, 
5. Nervousness over the forthcoming Italian budget which threatens to challenge the Euro zone hierarchy 
6. Geopolitical fallout from the Khasoggi murder which could upset Middle Eastern alliances.

Apart from the ones mentioned above, we still expect some geopolitical difficulties to occur, which may further strengthen gold and help it in breaking its comfort zone.

Gold has been back above $1,200 an ounce for the last two weeks, helped by safe-haven buying due to weakness in global equities and geopolitical tensions. Last week, Gold rose to test monthly highs near $1,240/oz but lost strength and pulled back. The retreat from the top, continued after the ECB meeting and during the American session, amid a stronger US dollar against majors and despite an improvement in risk appetite.

When the yellow metal crossed $1200 mark, it saw many investors retuning to the market with a great interest in gold. Retail buyers have started making their purchased as they expect a further price rise. Further, the investors’ class is also taking some stock profits as Wall Street volatility increased and they’re moving some of those profits to safer or more opportune areas, including gold and silver.

It’s not only the small investor class but also major central banks that are adopting gold. Russia and China have also been trying to win support from global governments to create a new gold-backed currency, thereby removing the US dollar as the world’s reserve currency.

Gold’s impressive performance of late, coming amid USD [U.S. dollar] strength, suggests that gold finally is behaving like a safe-haven asset.  There has been a pickup in gold purchases by central banks, including Hungary, Poland, India, Turkey and Mongolia, in addition to regular gold buyers Russia and Kazakhstan. And if this continues we will soon see gold at record highs.

Gold gains acceptance

Gold has time and again proved its worth. This time gold took long to do so, but it has finally gained acceptance. Once again gold has proved that it is one of those investment assets, that is capable of reducing portfolio risk and boosting returns in times of uncertainty.

Currently, looking at the geo-political environment, the benefits of gold will stand out further mainly for 3 given reasons-

1. Other asset classes - gold has a low and sometimes negative correlation with other asset classes. For this reason alone, many institutional investors include a modest allocation to gold in their portfolio. Today, gold’s lack of correlation with conventional assets is particularly significant because markets are increasingly inter-connected and volatility is a persistent concern. Diversification into assets such as gold is widely accepted as a smart way to lessen risk.
2. Alternate currency- gold can act as an alternative currency. A prolonged period of monetary easing has caused a sharp increase in money supply and reduced the value of fiat currencies. Over the past decade, for example, the US dollar, euro and RMB have depreciated sharply against gold. The dollar and the euro have more or less halved in value against gold since June 2007, while the RMB has fallen by around a third. One of the main reasons of stock piling gold is that that central banks and main financial want to reduce dollar dependency and instead store gold as an alternate currency.
3. Zero Credit risk - gold has no credit risk. It does not compose an obligation of a government so it is not a liability. As such, ownership of allocated physical gold protects investors from credit risk, providing considerable comfort during times of crisis.

Now what lies in future for gold mainly depends on the strength of the dollar. Once the impact of the President Trump-initiated tariff wars, particularly those affecting Chinese imports, starts to impact U.S. domestic prices and margins, which they undoubtedly will, this could tip the U.S. economy into recession.  Should this happen equities markets would likely start to spiral downwards, the dollar’s strength would weaken again and this could all force the Fed’s hand.  It wouldn’t want to see the blame for any downturn movement in equity prices being attributed to its interest rate policy.  But that could be a reaction too late.  Past history seems to be littered with U.S. recessions following Fed tightening patterns.  Could we see this happening again?  If so the gold price, in U.S. dollars at least, could be a major beneficiary