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12 June 2020

A Golden Opportunity?

James Rowbury, Investment Research Coordinator

Bond markets are pricing in significant UK inflation over the medium term while the US resides at less than half of that. This divergence may be too great; together, these seem to paint very differing pictures of two key economies coming out of this virus. The headwinds of Brexit will weigh heavily on the UK consumer, but the low oil price, a key driver in the inflation basket, puts a ceiling on this.

In the US, with Treasury yields at all-time lows and central bank policy fixed on prolonged low interest rates and indefinite bond purchasing programmes, there is concern of a potential devaluation of the US Dollar and Sterling.

Small positions to gold are now considered in asset allocations, through specific allocation to gold bullion ETFs. For higher-risk clients, it may be appropriate to introduce gold mining exposure for a leveraged return on the asset class, again through a passive vehicle to diversify the inherent political risks posed by the sector.

Gold has remained a contentious asset class amongst investors; it is volatile in nature, while demand is often beholden to its commercial use. To understand its behaviour, the asset should be viewed as a currency; a consistent and long-standing hedge against global reserve currencies. Why? Its price has a clear correlation to real yields, which have two key drivers; interest rates and inflation. As demand dries up, both are racing to the bottom, but if a recovery causes inflation to turn, it will erode the value of cash. Furthermore, gold remains one of the only true diversifiers in a climate when correlations of traditional asset classes have begun to converge over the last 20 years and as such, it has a proven track record to hedge macro-economic risk.

While there is some fluidity of news flow around the pandemic, it is clear that managing risk effectively is crucial for portfolios. These ‘black swan’ events are always a surprise, though their impact can be mitigated.

Please note that investments and income arising from them can fall as well as rise in value. Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
A Golden Opportunity?
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