Precious metal: Investing in gold lowers portfolio risk

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Published: December 31, 2018 1:24:43 AM

Gold prices will move up gradually and prove to be a useful portfolio diversification tool.

Illustration: Shyam Kumar Prasad

The year 2018 has been a choppy year for gold. Although ending lower for the year with its fair share of ups and downs, broadly speaking gold’s held well given that dollar gained about 9% from the lows and commodities collapsed. Gold which traditionally does well in times of political uncertainty has a lot going for it.

Gold prices have largely struggled this year as the market has had to readjust its expectations of Federal Reserve policy and its resulting impact in form of a stronger U.S Dollar. Investors have flocked to the US where tax cuts and deregulation have sparked a pick-up in economic growth. This stability in the U.S. economy comes as sluggish growth and a loss of momentum are taking hold elsewhere, making U.S. Treasuries and the dollar the main focus on investor attraction.

Selling pressure on gold

Two critical factors that have exerted the greatest selling pressure in gold has been the strong US dollar and the Federal Reserve’s current monetary policy of quantitative normalization resulting in gold dipping below the $1200 an ounce levels in mid-2018.

It’s been trading sideways as investors shunned gold and favored the dollar and Treasuries instead as they weighed the uncertainties surrounding the impact of a U.S.-China trade war on global growth. Despite uncertainty with respect to Trump’s unpredictability surrounding decisions still have investors place their bets in dollar for now.

Given the recent pessimism on outlook for growth in the U.S and other parts of the globe and the fact that Fed can only showcase limited aggression in such a decelerating economic environment, gold has attracted some buying as equity markets now look shaky. Although, prices have recovered from the lows, gold will still end the year with a loss of -3% in 2018.

Gold Outlook

US economic growth momentum continues on the back of tax cuts, fiscal stimulus and strong business and consumer confidence. However, there are now some definite signs of slowing and the momentum will certainly fade in the course of 2019 with rising interest rates, further Fed quantitative tightening and as the fiscal stimulus will have run its course.

The expansion in Europe is moderating as a toughening global economic environment challenges their external sector. However, the bigger challenge with Eurozone is concerning its political crises with Italy been a major issue. Last time Italy found itself near bankruptcy, it was saved by the ECB’s decision to launch into a decade of money-printing, heavy intervention and massive government bond purchases.

However, the ECB is now set to stop and reverse the measures that facilitated this favorable environment that supported the entire European economy after the last recession. Given the macroeconomic picture, gold prices should move up gradually and prove to be a useful portfolio diversification tool and thereby helping you to reduce overall portfolio risk.

(The writer is senior fund manager, Alternative Investments, Quantum Mutual Fund)

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