Gold is at a year-long high: will it keep rising?

What explains gold’s recent climb?

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What a year it’s been. I don’t think I can remember one with as many twists and turns, both economic and political, since the fall of the Berlin Wall in 1989.

I’ve always been a bit of a sceptic when it comes to gold. After all, what’s the point of it? It’s a bright, shiny metal dug up from the ground with some industrial uses, and that’s about it. OK, that may be a massive understatement  but compared to other commodities like iron ore, oil or uranium, gold starts to tarnish a little. The price will fluctuate, sometimes increasing and sometimes falling, but that lump of metal will remain the same.

The past 17 years have been gold’s time

In contrast, a share is a part ownership of a company, and its value will rise as the business is more successful and makes more money. What’s more, many businesses pay out dividends that increase as their profitability increases, and which can be reinvested in more stock.

But when share prices are in the doldrums, as we have seen over the last 17 years of the equity bear market, then commodities tend to boom. And this includes gold, which has seen a stunning rise in value, from $250 an ounce to $1,800 during this resurgence in metals and minerals. This was gold’s time, and many canny investors will have made fortunes during this period.

But as we reach the tail end of the commodities super-cycle, I’ve noticed something interesting in the gold price chart. Since touching a low of $1,050 an ounce in December 2015, gold has been steadily climbing to its current price of $1,320 an ounce. That’s quite a rise, and is as high as the gold price has been since the boom days of 2013/14.

In uncertain times, investors have turned to gold

But perhaps this isn’t surprising considering the political ructions of the past few months. I always questioned the point of holding a referendum about whether Britain should stay in the EU. And particularly if, like David Cameron, you actually wanted the UK to stay in Europe. Why would you take the risk?

As regards the effects of Brexit, I think the head of the ECB, Mario Draghi, hit the nail on the head when he said we’ll have to wait and see exactly what its effects will be. The truth is that nobody knows yet. Predictions about renewed recession and weak business activity are no more than speculation.

But what the Brexit vote has introduced is uncertainty, and it has done this in spades. Will investment in Britain go up or down? What will the effect be on share prices? Or jobs? Or inflation? We’re currently in uncharted territory, and Britain seems to be a country in limbo. That means uncertain investors look to the security of gold.

The question is, will gold keep on rising? My gut instinct is that there may still be more to come in this mini-bull market. But if, as most people hope, the economic situation settles down, I would still bet on shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

 

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