Gold gets Brexit boost but is it a good buy?

With investors turning to perceived safer investments following the Referendum, Darius McDermott, MD of Chelsea Financial Services, gives his view on gold

Gold gets Brexit boost but is it a good buy?

Gold has a long history as a hedge in uncertain times and so its 13.8% rise (in sterling terms)1 on Friday after the UK voted to leave the EU is not surprising. On Monday, it soared above £1,000 per ounce for the first time since early 20132.

The precious metal, which is first priced in US dollars, has benefited from a ‘double whammy’ from UK investors’ perspective. Firstly, it has been in demand globally as a safe haven asset, pushing up its value in USD, and secondly, as the British currency has fallen, gold’s price in pounds has further gained.

Gold is up around 40% in sterling terms in the year-to-date3. For those that haven’t already bought in, the obvious question becomes: is it still worth buying?

In my view, the answer is yes. There are lots of good reasons to hold gold in your portfolio, no matter what’s going on in the world.

A true negative correlation

Previous research from FundCalibre has shown how few assets in this day and age are truly negatively correlated, especially in times of crisis.

A negative correlation means assets that move in one direction when others move the opposite way. Think of it like a see-saw, when one end goes down, the other end goes up. This is extremely important for long-term investors who want to build a robust portfolio that can withstand diverse market conditions.

In fact, our analysis of different assets’ performance throughout the global financial crisis showed that only gold was negatively correlated to equities, corporate bonds and commercial property4.

UK government bonds (gilts) also held up well, with low negative correlation to most asset classes. Although demand for these has also been high in the immediate Brexit aftermath, major ratings agencies have raised question marks over Britain’s longer term credit outlook if its economy shrinks. We’re not going to suddenly become uncreditworthy, but a downgrade could affect the desirability of gilts as safe havens.

What’s more, given Brexit is hardly the only storm cloud on the global growth horizon—US elections and China could easily herald more havoc—gold may yet have more to give in 2016.

Fights inflation and deflation

For some time now, we’ve been in a low interest rate, low bond yield environment. The goal of low interest rates is to stimulate economic growth (and subsequently inflation). Inflation, however, has been stubbornly difficult to achieve; deflation remains a constant risk. So central banks keep lowering rates.

What this means for your personal investments is that any money you’re holding in cash or even bonds is not likely to be generating terrific returns.

On the flip side, because Brexit is causing our currency to lose value, at least in the short term, we can expect the prices of the things we import to rise, for example food. So we could suddenly see inflation after years of nothing, which could then start to eat away at the value of your cash and fixed income holdings.

Because gold is scarce, it’s difficult to mine (its global supply increases only marginally each year), it’s difficult to damage, and it can be moulded to meet lots of purposes, it has proven time and again to hold its value in both inflationary and deflationary scenarios.

Even if everything Brexit-related resolves sooner than expected and investors end up selling off some of their gold (causing it to come down from recent highs), it’s still good to own some of it over the long term. Assuming you don’t have access to a suitcase of little gold bars (most of us don’t!), you can go for a fund to get exposure.

The Elite Rated BlackRock Gold & General fund invests in shares of gold miners, which means you may see some correlation to equity markets. But the fund has excelled in the volatile year-to-date, with total returns up 88.6% versus a 34.7% rise in the gold price5.

 

1FE Analytics, Bloomberg Gold Sub, GTR in GBP, 23/06/2016–24/06/2016

2Goldprice.org

3FE Analytics, Bloomberg Gold Sub, 31/12/2015–27/06/2016, accessed 27/06/2016

4FE Analytics, IA sectors, correlation data, 01/10/2007–01/10/2008, accessed 04/03/2016

5FE Analytics, BlackRock Gold & General D Acc v. Bloomberg Gold Sub, TR in GBP, 31/12/2015–24/06/2016, accessed 27/06/2016

 

Please remember, no news or research item is a recommendation to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest.

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