The gold market in 2017 seemed like 2016 all over again. The first half saw gold prices move up gradually only to give away some gains at the end of the year. The correction from middle of September was attributed to optimism surrounding rate hikes. The US stock market hit numerous records and optimism grew over US president Donald Trump’s tax reform helped sustain the declining momentum. Gold prices pared performance, ending the year with over 7% gains aided by weakness in dollar. Not only were the gains better as compared to the low yielding fixed income instruments in the developed world, but also proved resilient in an environment where equities kept ticking higher to record levels each day. Adding liquidity
Central banks continue with their monetary experiment of adding liquidity which is nothing but fueling asset markets, suppressing volatility and in the process temporarily created an uneasy calm in financial markets. The frivolity is reflected in equity and bond markets globally where risk has been completely mispriced. Equities are looked upon as without an alternative, trillions of dollars are yielding negative today and credit spreads are at historic low levels. It wasn’t just the Federal Reserve; the European Central Bank (ECB) and the Bank of Japan have both grown their balance sheets more than the US has. With the newly created money they have been bidding asset prices higher. The Bank of Japan openly deals in the forex, debt and equity markets, buying ETFs on a very regular basis and becoming one of Japan’s largest public shareholders. The ECB has spared any bond it can justify buying under its rules. Outlook
The trickle-down theory was applied by central banks in the hope that by giving a boost to asset prices they would create wealth that would further trickle down to the bottom 50% of the US population or to Main Street. In reality, it did little to boost consumption and largely increased disparity by benefitting the asset owners, i.e., the wealthy. As a result, US stock market as a percentage of GDP is now far bigger than it was at the housing bubble’s peak, and it’s rapidly approaching the dot-com bubble peak. There are several threats to present global macroeconomic conditions, ranging from heightened political risks, massive increases in global debt, erroneous central bank and government policies. At the other end, Bitcoin’s surge is attracting investor interest toward the cryptocurrency and it is clear that money that might otherwise have gone into gold plays of late has been attracted to the crypto bubble phenomenon. However, stocks and cryptocurrencies both could end up being supportive influences for gold. Both investment demand and prices will rise further the next time the economic and political environment inspires investors to rush even more dramatically back to gold. The world continues to remain in a state of great disequilibrium, both with respect to the global economy and geopolitics. The fallout of geopolitics globally seems to now cap the downsides in gold. Given the macroeconomic picture, gold will be a useful portfolio diversification tool and thereby helping you to reduce overall portfolio risk.
The writer is senior fund manager, Alternative Investments, Quantum AMC