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