Gold and 2018: Looks Like the Perfect Storm


by Alex Deluce, Gold Telegraph:

Gold prices hit a five-week high of $1,351.20 per ounce last Monday amidst reports of escalating threat of a trade war between the US and China, forcing investors rush to the safe haven gold. The gold prices also rallied on the back of Goldman Sachs analysts turning bullish on the yellow metal for the first time in over five years. The price increase was also fuelled by the appointment of John Bolton as the new national security adviser by Donald Trump, as the new adviser is considered a foreign policy “hawk”, accentuating geopolitical tensions.

The recent upsurge in gold prices is also attributed to the United States’ expulsion of 60 Russian diplomats for a nerve agent attack on a former Russian spy in Britain. Though the precious metal is always considered as the “go-to asset class” during times of political upheaval, it will be interesting to see whether the recent precipitous slide in the stock market will further fuel the surge in gold prices.

Four fundamental attributes of gold in a portfolio

Before we dwell deep into the relationship between stock prices and the yellow metal, let us consider how gold is positioning itself as a must-have in anyone’s portfolio, including large institutional investors.

First gold can be considered as a true and effective diversifier, particularly during times when other asset classes witness heightened volatility. Though other asset classes such as broad commodities, real estate, hedge funds were claimed to be a true diversifier, they failed to pass the test during the 2008-2009 financial crisis, as prices in all these asset classes dropped in tandem with stocks and other risky assets. However, gold has been consistently proved to be a real diversifier both during times of economic expansion and contraction:

Secondly, gold has been providing consistent returns over an extended period of time. The yellow metal’s price increased by an average of 10 percent per year since 1971.

Gold’s performance would be more pronounced during volatile times. For instance, during the recent stock market sell-off on February 5th, the yellow metal rallied strongly and posted higher returns than the short term treasuries:

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