Political uncertainty is rising – is it time to buy gold?

The price of gold rallied to a five-month high of $1,294 in April, amid geopolitical tensions. News about US airstrikes in Syria, North Korean nuclear tests and looming European elections have all fuelled demand for the safe haven metal. 

Moreover, the Vix index – Wall Street's so-called fear gauge, which measures market expectations of near-term volatility through an analysis of S&P 500 option prices – has also hit its highest level since the US election last November.

At the moment gold is trading at around $1,280 an ounce and this amounts to a 2 per cent increase over one year. So is it time to invest in gold or do other assets provide better diversification?

While gold may be up only 2 per cent in dollar terms over the last 12 months, it is up by 15 per cent in sterling terms, Russ Mould, investment director at AJ Bell, points out; he adds that gold has ‘provided useful portfolio ballast during an uncertain period for the world economy’.

Echoing this sentiment, Nathan Sweeney, senior investment manager at Architas, first added gold to his portfolios in 2016, and he has increased his allocation slightly in recent weeks, citing the heightened uncertainty brought about by the snap general election as a reason.

‘We are potentially in the advanced stages of this current market cycle, so we think it prudent to add in an asset that has no counterparty risk or duration risk and can do something truly different in a period of stress,’ says Sweeney.

‘We see gold as providing a level of downside protection in portfolios, which is what we are seeking at the current time. Alongside this we have increased our exposure to alternative assets, such as infrastructure, renewable energy and catastrophe bonds. This includes the John Laing Infrastructure fund and John Laing Environment Assets funds.’

Mould further argues that ‘any heightening of geopolitical tensions in Asia or the Middle East could prompt a further leg up in this haven asset, while any feeling in the market that central bankers will let monetary policy run looser than expected for longer, in response to any unforeseen event or economic setback, could also favour the precious metal’.

However, David Coombs, head of multi-asset investments at Rathbones, is not a fan of gold at the moment, because it doesn’t do well when interest rates are rising. He prefers the dollar to the yellow metal as a safe haven, as gold doesn’t produce an income.

He also says that while the gold price is high at the moment, he ‘can’t back it up with science’. In addition, the price of gold can move quickly ‘if any of the institutional players decide to make a big trade.’

He adds: ‘People think gold is a hedge for inflation, but it’s actually only a hedge for hyper-inflation, which is when people have completely lost trust in money. If it was the only safe haven asset around, I’d have it.’

But gold is not the only safe haven on the scene. Coombs likes a spread of safe haven assets and this spread is something he is adjusting constantly. At the moment he favours Swiss francs and corporate bonds, in addition to the dollar.

He explains: ‘Swiss francs are often seen as a safe haven currency, and with currency volatility and political risk in Europe elevated this year we feel this is an appropriate form of insurance for our portfolio funds. The bonds we own to access this are Vodafone and Credit Suisse.’

Coombs says the current key risks are first, that inflation could rise to 4-5 per cent, depending on how the Brexit negotiations go, and secondly, the uncertainties associated with the European elections. He thinks market liquidity is not very good at the moment, which is why he is holding cash as well.

Another asset he considers a safe haven is big companies that have pricing power, such as Amazon or Alphabet, because they have few or no competitors and high-end intellectual property.

Mould says if markets decide they need a haven, the US Treasuries are a logical place to consider. However, in contrast to Coombs, he believes inflation may not be a key risk.

He says inflation expectations are sinking again and there are still some powerful disinflationary – or even outright deflationary – forces at work, including demographics (ageing populations in the West, who will progressively spend less), debt (which is now 30 per cent higher globally than it was in 2007, at more than $200 trillion).

‘As such US 10-year Treasury bonds on a yield to maturity of 2.2 per cent and US 30-years at 2.9 per cent may well appeal to haven-hunters, especially as you get the world’s reserve currency, the dollar, on your side at the same time.’

Meanwhile, David Jane, manager of Miton’s multi-asset fund range, asks us to consider an unexpected region as a potential safe haven: the UK.

He argues that the forthcoming election removes more uncertainties for investors than just scaring out the consensus short position in sterling. ‘While many elections in the recent past have been close calls, this election is very unlikely to lead to anything other than a stronger Conservative majority.’

Therefore, Jane concludes: ‘As far as financial markets are concerned, this means much greater certainty around the Brexit negotiations and government policy in general. This makes the UK look relatively more attractive, from a political risk perspective, than before the announcement, particularly relative to continental Europe where there are close-run elections in the three largest economies coming up over the next year.

‘So the UK might be considered a safe haven relative to many other markets, with clear political leadership, an economy benefiting from a weak currency, continued low interest rates and a robust consumer sector.’

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