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Today, we have an interesting contributed post on why gold may not be the safe haven investment it is touted to be. I know some things here surprised me. So, I'd love to hear what you think in the comments.
Whenever there is volatility in the equity market, many investors will instinctively take cover in other investments and watch from the sidelines until the markets stabilize. One of the typical ‘safe haven’ investments that they take advantage of during such periods is gold. Still, questions need to be asked regarding the long-held notion that gold trading provides safety for investors.
Gold trade presents an investor, looking to hedge against volatility, with a number of complex issues. First, there are several market forces that come into play in gold trading on exchanges, which makes it susceptible to fluctuations in the financial markets. In addition, because you do not receive a coupon or dividend when trading in gold, you cannot be sure what you will receive at maturity as it is an investment without a par value or maturity date.
Analysts believe that although gold has lost some value over the last year, it is expected to be stronger moving forward. Most brokers have pegged the price of gold to remain relatively low through mid-2019, which means that this may be a good time for speculators to buy and hold until the price eventually rises.
The gold market is just one piece of a large puzzle according to analysts who advise investors to buy the metal now. They also point to stronger US economic data, low interest rates and the moves expected from the US Federal Reserve to urge more investors to put their money into gold.
According to Ryan McKay, a Commodity Strategist, the price of gold isn’t correlated to the debt and stock markets, both of which are at relatively high levels. He adds that the price of gold could rise if there is a drop in these markets. In cases where interest rates are low, gold could prove a worthwhile investment, but it gets less attractive with increased rates. McKay says that gold trade complements an equity-packed portfolio, offering a way for individuals to balance their investment options.
It is natural that each investor will have a different concept of what constitutes a ‘safe haven.’ Gold’s long history as an investment used to hedge against inflation has been, by-and-large, self-fulfilling. Some market watchers believe that the reason pundits have touted the idea that gold is losing its luster as a hedge against inflation is down to the simple fact that there has simply been little inflation of note in the Western Hemisphere markets to hedge against.
Still, in certain Asian markets that have experienced significant inflationary pressures of late in addition to depreciating currency values, gold is still the asset that many investors choose to combat these intertwined forces.
However, with the Dow Jones Industrial Averages, as well as the Toronto Stock Exchange, having more and more volatile weeks recently, lots of North American investors are starting to wonder whether they would be better served putting their money into ‘safe’ investments like gold.
The counter argument is that the past 12 months have been a veritable roller coaster ride with regard to gold trading, with analysis providing evidence that gold may not necessarily be the safe haven that it is portrayed to be during periods of volatility in the stock market. A growing number of portfolio managers are eliminating gold completely from their portfolios, believing that there are other options which can better protect from swings in equity investments.
Stephen Lingard, a portfolio manager, says that gold trade is no longer the effective defensive investment it was once perceived to be, adding that he now focuses on alternative investment avenues that offer higher value during volatile periods. His recommendation for investors seeking defensive additions to their stock portfolios should consider putting money elsewhere; this may be in bonds or in the more defensive currencies such as the euro, Swiss Franc or Japanese Yen.
Because gold performs poorly in financial environments where interest rates are above three percent, an investor buying gold is hedging on the hope that the interest rates will stay low.
Gold trade can work well as temporary protection from volatile equity markets, but just as long as there is a weak dollar (USD) and the other market forces that support gold. Remember that the price of gold, just as that of any other financial investment, will fluctuate, so you could lose money in the long run.
If you are to go into gold trading, you should do so because you expect that there will be a long-term bull market for precious metals, not because you anticipate a collapse of the stock market. Also, do not fall for the analysts preying on investor fears to force them to buy gold because the general consensus is that both metals and equity markets should continue to rally.