If the past week’s events have taught us anything, it’s that a week is an eternity in financial markets.
Gold surged to new seven-year highs in mid-week trading as tensions between the US and Iran intensified. But with the icy rhetoric between the sides moderating and no fresh military conflict unfolding, safe-haven bullion has retraced about 40 bucks, to around $1,550 per ounce. Equity markets have risen as risk appetite returned.
It’d be a mistake to believe that gold has shot its bolt, though. Aside from the possibility that hostilities between Washington and Tehran could flare again at any moment, there’s a galaxy of other macroeconomic and geopolitical factors that could send yellow metal values surging again.
Gold ETFs rise again
The latest data on gold buying from the World Gold Council (WGC) illustrates my point perfectly. Even before the assassination of general Qassem Suleimani by US forces last Friday, investors were rotating into gold in anticipation of shocks to the global economy.
In what proved a stressful year for investors, total holdings in gold-backed ETFs grew by 400 tonnes annually in 2019, the WGC says. Collective holdings hit all-time highs of 2,900 tonnes in the fourth quarter.
And in a sign of positioning for the new year, net inflows rebounded in December following outflows in the previous month. These clocked in at 13.8m tonnes and had a value of $486m.
More central bank cuts?
We might be at the beginning of a new year but it looks as if the same factors that drove bullion demand in 2019 will support buyer interest throughout 2020, too. Along with concerns over a prolonged and difficult Brexit process, US-led trade wars, the US impeachment proceedings and upcoming presidential election, economic data from China and Europe threatens to keep nerves jangling.
The threat of rising global inflation and subsequent fears over the value of paper currencies is likely to support demand for ‘hard’ currencies like gold too, as major central banks continue on their paths of doveish monetary policy. Indeed, the Bank of England has already raised expectations of additional policy loosening in 2020. Outgoing bank chief Mark Carney commented this week that a “relatively prompt response” could be in order should the UK economy continue to splutter.
One of the best
In the current climate, then, it would appear as if joining the herd and buying into a gold-backed ETF would be a sound idea right now. Personally speaking, though, I would rather purchase shares in one of London’s quoted gold producers, a strategy that allows investors to ride gold price strength while receiving the extra boost of dividend income.
Take Polymetal International as an example. The FTSE 100 share soared 46% in value in 2019, outstripping the 12% enjoyed by the broader index, as gold values increased and production levels impressed. And Polymetal is in a strong position to boom again in 2020, a year for which it also offers up a chunky 4.8% dividend yield. City analysts certainly think so and they’re tipping a 32% profits rise.
The last year has shown us that having exposure to gold is always a good idea for the modern share investor. I reckon Polymetal is one of the best ways to achieve that.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.