As the countdown to Brexit continues, many investors are nervous about the various scenarios that may play out in the final days of negotiations. More importantly, not many analysts agree as to how investment portfolios may be affected after 31 October.
I frequently get asked whether Brexit concerns may spur safe-haven bids for gold. It would be hard to calculate the effect of the final Brexit days on the actual price of gold. However, I’d like to encourage our readers learn more about the gold market – from what drives the price of the underlying bullion to how they can include gold shares in their portfolios. We cannot know the future with certainty. However, for many people physical gold is an asset for defensive diversification. Let us take a closer look.
Gold prices + economic/political developments
Gold is proving to be one of the best investments in 2019. Over the past year, the gold spot price is up over 25% and hovering around $1,505 per ounce. Investors may remember that in 2010, it was about $1,050. By late 2011, it almost hit $1,900, at which point a multi-year decline began. By 2016, it was below $1,100. In mid-2018, the current rally began around the $1,200 level.
There are several reasons behind this recent rally, ranging from the worries about the escalating US-China tariff war, volatility in the oil market, talk of a global recession, macroeconomic fears, uncertainty in Europe partly because of the developments on the Brexit front, and rather choppy and feeble global equities.
Analysts are also discussing the near-term possibility that US dollar interest rates may go to zero and that pressure may be put on the Federal Reserve Board (Fed) to introduce negative rates. If US dollar deposits see negative rates, smart money is likely to move not into other currencies, but possibly into commodities, including precious metals such as gold. On the other hand, in general, rising interest rates are not good for gold prices – since gold pays no yield.
So if you believe that the next bull cycle in gold is under way and would like to invest in it, then you can buy into gold in several ways.
Gold shares
In recent months, many gold miners have seen their share prices pop as global the gold price has surged. Within the FTSE 100 and FTSE 250, companies that mine gold include Chile’s Antofagasta, Mexico-based Fresnillo, Russian mining operation Polymetal, and Centamin which focuses on the the Arabian-Nubian Shield.
However, share prices of gold miners can be more volatile than the price of physical gold. There may also be geopolitical risks regarding the country where a specific mine is located.
Investors should also note that most gold stocks are low-dividend payers and data suggests that gold shares do not necessarily offer superior returns in recessions so researching them is important before investing.
Then there are investment funds or exchange-traded funds (ETFs) that invest in gold miners. Examples of such funds would be the BlackRock Gold and General or iShares Gold Producers UCITS ETF.
Alternatively, you can also consider ETFs that invest in gold itself such as ETFS Physical Gold. The fund, which was launched in 2007, is large, well-known, and liquid. With an ongoing charge of 0.39%, it may be suitable for investors looking for the kind of safe haven that would be offered by gold itself, especially in the short term.
