Gold is still in the news a lot these days, and I am almost always about it by clients at some point. The precious metal has had an impressive run from the 500 dollar per ounce resistance level that it broke through in the early 2000’s. Is there still room to run for gold or has it had its day for now? This is a very interesting question that has a few possible scenarios.
The first scenario relies on the bulk of the bigger investment managers believing that central banks around the world will continue to compete to devalue their own currencies and pursue policies that typically see gold’s safe haven status help it rise. Of course this isn’t a guaranteed outcome, and one could argue that the potential path of future central bank money printing is already priced into the roughly 300% gain from the low to high of this recent bull market.
The argument against gold stems from the possibility that everyone who would buy up gold as an insurance policy against inflation, and there is nobody left to buy. You can see the downside risk of being late to the game in gold if you look at the attached chart. The previous bull market in gold ended with a very similar looking pattern as this most recent peak and retracement.
While this is only one possible scenario, the thing to note from the chart is that gold went into a roughly 20 year slow downward spiral after that peak. That is the risk of buying into gold at these levels, however if you pair gold with something that does traditionally well in the kind of environment where gold goes into that kind of price action then your portfolio should be fairly well hedged. That is in fact the main reason why I usually stick a small holding of gold into a portfolio, purely for the diversification benefits and hedge against massive money printing programs.
The scenario where gold turns back around and heads North of 2,000 is one where everything else in the world is turning back into a replay of 2008, and in that event you would most likely be very glad you held onto some.
The question then becomes how much of an investment portfolio should you allocate to gold and other precious metals. Unfortunately that very much depends on how optimistic or pessimistic your view of where the world is headed. My advice would be to keep it in proportion and not put too many of your eggs in one basket that can trend slowly downwards for such a long period. The stock markets may crash repeatedly, but they almost always have recovery periods that are quite short relative to gold.
David Mayes MBA provides wealth management services to expatriates throughout South East Asia, focusing on UK Pension Transfers. He can be reached at david.m@faramond.com. Faramond UK is regulated by the FCA and provides advice on pensions and taxation.
