Gold – Is it really a safe haven for an investor?

Gold A Safe Haven Gold   Is it really a safe haven for an investor?

Gold prices have been relatively steady and range bound in the last 5 years, between $1350/oz on the upside and $1100/oz on the downside. Check out the chart below to get an idea of how gold prices have moved in the spot market.

Gold Chart Gold   Is it really a safe haven for an investor?

After touching a high of $1900/oz (gold prices are internationally measured in Dollars per Troy Ounce) in 2011, gold prices fell sharply to touch a low of $1050/oz in early 2016 when the Fed hiked rates for the first time in 10 years. Since then gold has largely been range-bound between the levels of $1100/oz and $1350/oz.

What are the triggers for gold price movement?

Before we get into whether gold is a safe haven or not, we need to understand the triggers that drive the price of gold. Historically, there have been some key factors driving the price of gold. First and foremost, gold prices are inversely related to the value of the dollar. Therefore a strong dollar index results in weak gold prices and vice versa. Gold rarely gives positive returns when the dollar is strong. Secondly, gold delivers the best value in the midst of geopolitical uncertainty as investors prefer the safety of gold. We saw that between the tumultuous years between 1971 and 1979 after the US walked out of the Bretton Woods gold standard. This trend of gold prices appreciating sharply was again seen after the uncertainty in the post Lehmann scenario. Shaky geopolitics is the time when smart traders park monies in gold. Thirdly, when currencies get debased due to too much money getting printed, gold emerges as an alternative currency. Interestingly, the traditional jewellery demand has rarely driven the price of gold.

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How is gold poised to perform in 2019?

Let us look at the outlook for gold on each of the above factors. Firstly, gold demand for 2019 is likely to be better than the previous year and that has also been borne out by the latest statistics coming out from the World Gold Council. Secondly, let us focus on dollar strength? According to the Federal Reserve, there could be not more than 1 rate hike during 2019 and even that may be done away with if the growth does not pick up. Dovish rate scenario will drive down the yields on US bonds and simultaneously weaken the Dollar. While dollar may not see a sharp fall due to its exorbitant privilege of being the pivotal trade and reserve currency, the Dollar Index is likely to show weakness. That is again likely to be positive for the performance of gold.

Thirdly, the question is whether central banks will debase their currencies further by infusing more liquidity into the system. Currently, the US Fed sits on bonds worth $4.5 trillion while the ECB sits on bonds worth €4.1 trillion. This massive bond portfolio of central banks was largely created post-2008 when these central banks infused liquidity into the system by mopping up bonds. After talking about tapering for a long time, global central banks are again talking about keeping liquidity comfortable to prop growth. If the US, EU and China follow a liberal liquidity policy, then gold is going to benefit! Finally, we come to the geopolitical uncertainty. There are enough reasons to worry. The situation on the India-Pakistan border is quite volatile. China has been gradually expanding its presence in the South China Sea and that has made a lot of countries uncomfortable. The Middle East continues to boil even as the US and China is locked in a trade war. Not to forget, Venezuela is veering towards a humanitarian crisis which could quickly spread to most of Latin America. All these factors do make a case for gold.

How to go about investing in this safe haven called gold?

Gold can be best relied upon to hold value in difficult economic and geopolitical times. That is a role that gold has performed to perfection and will continue to perform. The question is how do you take an exposure to gold? Here is how!

  • A long term investor in gold can look at buying exchange-traded funds on gold (Gold ETFs). They are liquid and track the price of gold very closely. It also saves you the hassles of storage, insurance, safekeeping etc.
  • Gold traders can also buy futures in gold by paying a nominal margin. However, one needs to be conscious of the risks involved as gold futures are a leveraged product and just as profits can multiply, losses can also multiply.
  • The Gold Bond scheme is something you must look at closely. Apart from a government guarantee of no-default, you also earn annual interest of 2.50%. These bonds are guaranteed by the Government of India and are also traded on the exchanges.

Gold will continue to attract interest from buyers in times of geopolitical uncertainty. The macro set up may just be ripe for buying gold. Of course, one can lose sight of the total exposure to gold that your financial plan permits.

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