Will gold go higher in a volatile market?

Darius McDermott 03/03/2016 in Specialist investing

Gold has been the best-performing asset class in 2016 and is up 22% year-to-date*. Its nearest rival is the Japanese Yen, which has increased 12% in value since the start of the year.

Both, rightly or wrongly, are deemed to be ‘safe havens’ so it’s probably not too surprising they’ve done well, given everything else has been so awful. Will gold continue to shine though?

Not according to Goldman Sachs who have suggested shorting the barbarous relic. I’m not so sure they are right.

Gold as an insurance policy?

As regular readers of my market commentary will know, I describe gold as an insurance policy against central bank stupidity – of which there seems to be a lot lately.

The latest weapon they have employed is negative interest rates. This is a clear indicator quantitative easing has not worked and now policy makers are adopting what can only be described as ‘non-macro prudential policies’, which could have profound unforeseen consequences.

In the US, where interest rates were increased in December for the first time in a decade, we are already witnessing a slowdown and analysts have been busy using their red pens downgrading company earnings for 2016. Expectations for change in interest rates is also being revised down.

In the short term, volatility is likely to continue in the markets. And so we come back again to gold, which is the only genuine insurance policy in shaky markets.

But how do you access gold?

That very much depends on your motivation. If you are looking for diversification and insurance then the exchange traded fund (ETF) route has to be the way. But if you do buy an ETF make absolutely sure the gold is in the vaults in allocated form.

That means a trip to the custodians and cross referencing the net asset value (NAV) with the actual number of gold bars held…! I’m game if you are. Not sure they’ll be so keen on day trippers dropping in though.

If you are looking from a speculative point of view and are prepared to stand the volatility then it has to be the mining stocks / funds route. Elite Rated BlackRock Gold and General is a geared play on the gold price.

Over the medium term, the BlackRock team believe there is the potential for the gold price to trend higher, with Asian retail demand and the possibility of inflation—driven by global monetary easing—potential sources of support.

On the supply side, plateauing mine production, limited gold discoveries and a collapse in investment in new mines should also prove constructive, as should the current low availability of scrap/recycled material

BlackRock does, however, expect the performance of gold equities to remain highly sensitive to the performance of gold bullion, and the improved capital discipline and operational efficiency seen in a number of companies to help rebuild investor trust.

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