OPINION: Why gold is looking attractive

By Roeloff Horne Time of article published Aug 27, 2019

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Traditionalists would argue that the purpose of holding gold bullion – which is normally held in an exchange traded fund as a proxy for physical gold – is to act as a non-correlated instrument, a hedge against inflation and/or a weaker rand (as it is priced in dollars). Many market participants also hold gold to hedge against global geopolitical risks, or to act as a store of value.

We do not think global inflationary pressures are a short-term threat, nor do we have a strong view on a weaker dollar.

Gold pays no interest and/or no dividends, which makes it impossible to value against securities that produce earnings, distribute dividends or any interest-bearing instrument.

In the past few months, the following arguments have convinced us to increase exposure to gold in our global and domestic portfolios:

In December last year, 52 percent of the central banks examined by Fitch were in a monetary tightening phase and only 3 percent were easing. Deterioration in global growth prospects, rising uncertainty about the future direction of trade policy, and a slowdown in global manufacturing and trade have now contributed to a widespread shift in central bank policy. These shifts to cut interest rates and capital market reaction have moved $16 trillion (R243trn) of government debt into negative yield territory.

Many investors argue that gold is the alternative currency of the world. Others argue Bitcoin and other cryptocurrencies are competing with gold as the world’s alternative currency. Cryptocurrencies would have had a place in a portfolio if we had only one cryptocurrency and not in excess of 300 (diluting its authenticity).

As the four largest global currencies have grown excessive government balance sheets due to money printing/quantitative easing, the race between the dollar, euro, yen and pound is on to weaken currencies in order to deflate “naturally” their debt bubbles.

Gold, as a store of value, therefore provides investors with more credibility, as it has no deficits to deal with.

In addition to being money for thousands of years, the price of gold is primarily a measure of faith in central banks. If you believe that central banks have everything under control, do not buy gold.

But before everyone rushes off to sell their equity portfolios for gold, we continue to believe that equities hold significant value for long-term investors due to their ability to generate cash flow and earnings growth in a low interest rate environment. We therefore continue to hold more global equities relative to gold in our portfolios.

Roeloff Horne is the head of South African portfolio management at MitonOptimal.


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