Why is gold up 11 per cent this year?
APRIL 21, 2017 by: Lucy Warwick-Ching
What does this show?
On Tuesday morning the gold price spiked at $1,286, ahead of prime minister Theresa May’s call for a snap general election. It then fell back slightly once sterling began to strengthen on the back of the news. The chart shows an 11 per cent rise in the gold price since the start of the year. The precious metal appears to be heading towards levels not seen since the election of US president Donald Trump last November.
Why are investors keen to buy gold now? Geopolitical tensions across the globe have increased dramatically in recent months, following Mr Trump’s recent announcement that he was prepared to take military action in North Korea. Investors are looking to the commodity as a refuge from this global uncertainty. Josh Saul, chief executive of the Pure Gold Company, an investment service, says the popularity of gold can be linked to febrile market sentiment as global tensions intensify over the likes of the US and North Korea. He said: “Over the past few days, confidence in financial markets has been depressed. We’ve had many clients removing exposure to equities as they fear the worst-case scenario between North Korea and the US. “They believe that both leaders are inclined to fight, which adds to the unpredictability of the global political and economic environment, and this lends itself to gold sales as a relatively secure investment or a form of portfolio insurance.”
Beyond the US, gold has had other drivers of demand so far this year. In Europe, investors are looking to protect themselves against the political risk associated with the upcoming French presidential election, where some fear the instability that would follow a shock victory by the far-right leader Marine Le Pen.
In Asia, the gold price is also benefiting from an uptick in jewellery demand in China after declining sales last year. Experts say another catalyst for the rise in gold price has been the US dollar’s fall in value. The commodity is inversely correlated to the currency: when the dollar falls, as it has done in recent months, investors have more buying power and gold demand goes up. Why do investors like holding some gold in their portfolios? Gold typically represents a safe haven for nervous investors.
Demand rose last year after the Brexit vote and Mr Trump’s election. The weaker yuan and low or negative interest rates also made gold more attractive, helping push up investment demand. The precious metal is also seen as a safe hedge against inflation. What are the risks of holding it? Since it provides neither a dividend nor an income, there is an opportunity cost in holding it. However, many investors believe that is worth paying at the moment, when interest rates are low and the price is likely to be rising. What are the forecasts for the gold price? Over the long term, experts predict that the gold price could rise much higher.
The market is expecting Federal Reserve interest rate increases, with up to two US interest rate rises predicted for this year and some expecting as many as four in 2018. Alongside this there are mounting political tensions between the Trump administration, Syria and North Korea.
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