Is Investing in the Safe Haven Gold Not So Safe anymore?


Throughout history, gold has been viewed as an asset class with high intrinsic value which can be turned to during market downturns. The price of gold typically fluctuates with political, economic and inflationary threats, generally falling during booming markets and rising in recessions. Since the precious metal doesn’t generate cash flow as such (‘nonyielding bullion’), its value has been closely tied to the status of the economy. Yet, gold has been exhibiting quite the opposite tendencies in recent years.

With the news on easing of fears on trade war between China and the U.S., U.S. withdrawing from the Iran nuclear deal, Israel and Iran pouncing on each other and many looking at the possibility of World War III, it is expected that investors might resort to gold in such times. However, whether it is a good time to buy safe havens like gold, becomes a pertinent question, particularly, in the event that geopolitical tensions start to put pressure on asset prices and economic growth.

Actually, there does not seem to be a straight forward answer to this. Many experts, like the ones from the Bank of New York Mellon have in fact recently said that history shows varied trends. It has been further reported that a bullish case for gold could have been made a few weeks ago, before the dollar’s current rally that kicked off in the recent times. Thus, during bouts of international tension, many a times gold prices tend to underperform as deflationary drag hovers around the minds of investors. These days as well, gold seems to be steadying as the U.S. dollar is dropping from its five-month high. There was little support from the risks prevailing in the broader financial markets. All eyes are now set to the U.S. elections which might impact dollar and eventually there might be an improvement in gold. On the other hand, rise in U.S. interest rates as the Fed meeting approaches do pose risks to gold.

All in all, gold becomes expensive when dollar becomes strong as it is a dollar-denominated asset; and it faces risks of U.S. interest rate hikes. As of now, dollar looks a bit weak and this may help investors grab gold stocks with good fundamentals. This trend might prevail in medium term while short term scenario seems to be wary of interest rates. As at May 23, 2018 reporting, spot gold was flat at $US1292.24 at 3.13 pm New York time.

At the same time, we have gold stocks like ASX listed Dacian Gold Ltd (ASX: DCN), which was seen to move up by 3.2% on May 23, 2018, in early trading session. The group’s 100% owned Mt Morgans Gold Project has witnessed strong shallow and deeper drilling results demonstrating growing potential of the Cameron Well discovery. The stock has thus bucked the trends and moved up. Thus sometimes, investors should look beyond the macro pictures while evaluating equities that can provide good returns over different time frames.

On the other hand, and given the prevailing uncertainty, many eye BetaShares exchange traded funds on the Australian Securities Exchange (ASX). Exchange traded funds are simple to use, liquid, transparent and low cost investment products; and as a result, are one of the fastest growing investment vehicles in the Australian Market. Particularly, Betashares gold bullion ETF thus become popular among investors trying to have an exposure to gold.


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