Tuesday, 26 March 2013

The Curious Case of Gold Bullion...

Cast your mind back to August/September 2011... During these volatile months Eurozone concerns regarding Greece escalated and many thought their exit from the Euro was imminent. Gold bullion, a safe haven asset, rose significantly in value over this period, with the price souring past $1,900oz in September 2011. At the same time other safe haven assets such as U.S. Treasuries and UK Gilts also rallied strongly with yields falling considerably during this period.

So what I've found interesting recently, particularly since the Cyprus bailout fiasco is the behaviour of gold bullion. Price has been stable, around $1,600oz but not provided that same protection to portfolios as it did in the summer of 2011. So what does this mean for gold's status as a safe haven asset? Well firstly it should be noted that the Cyprus bailout is less significant than Greece, and nearly 2 years on from summer 2011 the rest of the global (except Europe) economy is in a better state, so investors may not feel they need this safe haven asset. Secondly gold has other purposes than being simply a safe haven asset, it is also an inflation hedge. It could be that investors see QE coming to an end, particularly in the recovering U.S. and so inflationary pressures may ease, hence their reluctance to buy lots of gold.

For me however, I do think at this point in time gold could be a useful safe haven asset in portfolios. Other safe haven assets such treasuries and gilts are at low yields and thus you have to pay a premium for protection from these assets. Conventional government debt does not offer inflation protection, that gold should hopefully do. Coupled with this, demand from China and India for jewellery is significant and growing, and central banks continue to demand the yellow metal, to diversify away from their foreign currency reserves.

At the start of 2013 we have seen outflows from many gold ETFs, but for me this is a little premature. I'd consider holding gold until the economic landscape becomes a lot clearer and I am confident inflation will not rear its ugly head. Until then this asset, which is normally lowly correlated with equities, could be a useful position in investors portfolios...

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