Five reasons why gold can keep on shining, July 2019

Gold has been on a tear over the past six weeks, the commodity rising by 12%* over that period. This rally now appears to have paused since the publication of strong employment data in the US and the subsequent reassessment of US monetary policy expectations. However, Vincent Ropers, portfolio manager of the TB Wise Multi-Asset Growth fund, believes there are number of good reasons why the precious metal can continue to climb higher.

Here he gives us five reasons why gold can keep on shining:

1. A safer haven

“Gold is considered a safe harbour for investors amid gathering market storms. Often investors might opt for government bonds over gold, as they carry interest payments. However, as we see global bond yields declining in reflection of a gloomier growth backdrop, gold becomes more attractive on a relative basis.

“Meanwhile, cash, arguably the ultimate safe haven, is currently providing a negligible return due to a suppressed interest rate cycle. This is also increasing the attractiveness of the yellow metal.”

2. Inflation hedge

“Gold is a classic inflation hedge. Indeed, in times of economic uncertainty, gold is considered impervious to the actions of centralised institutions. As unprecedented levels of quantitative easing have flooded global markets with hot money, asset prices have risen, but so has the potential for a sharp rise in goods and services inflation.

“In this scenario, gold acts as a hedge against real value depreciation. The commodity is a powerful weapon against inflation, as policy actions cannot debase its purchasing power.”

3. Gold is under-owned

“Although central bankers have been buying gold at record levels in recent months, it remains very under-owned by private investors and institutions. If there was a further extension in the rally, it is not difficult to envisage short positions beginning to be unwound and the wider market going long on the metal.

“Interest rate cuts by central banks, particularly by the US Federal Reserve, could also help gold by weakening the US dollar. By making the US currency less appealing, gold becomes more attractive as it is priced in dollars.”

4. Technical case

“We also had technical break-out when the price recently passed through US$1,380/1,390, which have created a very strong resistance for the last six years. This milestone could also support the extension of a prolonged rally.

“Such technical levels, particularly in commodities markets prone to speculation, can act as powerful catalysts.”

5. Unrealised value

“As investors, we seek to unearth asset classes we think have the potential to perform well, while still offering some downside protection. Thus, instead of just tracking the gold price which will, without a doubt, remain volatile, we prefer accessing undervalued gold-related assets. Here, we have increased our allocation to the mining and resources sectors, which display attractive absolute and relative valuations at this stage in the cycle.”

TB Wise Multi-Asset Growth now has more than 6%** of the portfolio exposed to gold and gold miners, with diversified positions in the Merian Gold and Silver (which is on the Chelsea Selection) and BlackRock Gold and General funds.

*Source: www.bullionbypost.co.uk, returns in sterling from 1 June 2019 to 15 July 2019.

**Source: Fund fact sheet, 30 June 2019

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Vincent's views are his own and do not constitute financial advice.