Gold will be strong for long

In times of crisis and uncertainties gold has always been the most preferred form of investment due to its safe haven appeal. The safe haven status of the yellow metal can be justified by the following characteristics-

  1. Better long-term, risk-adjusted returns than other commodities and broad-based commodity indices.
  2. More effective diversification than other commodities, particularly in market downturns, with no meaningful correlation to oil over time.
    3. Better performance than other commodities in low inflation periods.
  3. Lower volatility than most single commodities and similar volatility to broad-based commodity indices.
  4. Proven store of value as commodity values fell sharply against gold following the end of the gold standard.
  5. High liquidity.

Currently too, Low or lower-for-longer nominal and real interest rates; global recession risks – exacerbated by US-China trade tensions; and heightened geopolitical rifts are combining to support a bullish gold market environment.

This week too we saw gold quickly recovering its dip but it rallied back above the key $1500 psychological mark to hit three-day tops.

The initial downtick to an intraday low level of $1489 turned out to be short-lived, rather was quickly bought into amid expectations of further monetary easing by the Fed, which seemed to be one of the key factors driving flows back towards the non-yielding yellow metal

Gold hit a six-year high this month as central banks ease policy to address the slowdown in growth amid the trade war. This week, investors expect the European Central Bank to unleash more stimuli, while next week the Fed is seen cutting rates again. That has helped to drive flows into bullion-backed exchange-traded funds as investors track the trajectory of the US economy.

Global financial markets remain in fragile risk on mode following last week’s announcement that US and Chinese trade negotiators would meet again in early October. While kicking the can down the road and past China’s Golden Week Holiday, we maintain the view that the road to a deal remains covered with obstacles. On that basis September could end up being the month of calm before renewed tensions emerges with the US raising tariffs again on October 1 while the two countries may continue to struggle with the 20% of a deal that currently keeps them separated.

We expect spot gold prices to trade stronger for longer, and posting new cyclical highs at some point in the next year or two.

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