After months of relatively lackluster performance, market conditions are increasingly turning in favor of gold. Inflation rates are trending downward, central banks around the world seem to be stepping back from their aggressive interest rate hikes, and all signs indicate that the global economy isn’t going into a freefall but a usual slowdown.
All these conditions, coupled with recent conflicts in the Middle East, which significantly increased gold’s safe haven appeal, caused gold to rally for the first time in several months. Currently investor interest in the precious metal is skyrocketing amid rocky economic conditions in most major markets, and many investors are considering increasing their exposure to the precious metal through either exchange-traded funds, gold stocks or gold bullion.
Demand from central banks has been an especially key driver of growth for the precious metal in recent months. Last year saw several central banks embark on a massive gold-buying spree that caused gold prices to surge to record levels. Even though central banks scaled back their gold purchases in early 2023, central bank demand, especially from countries such as China that are keen on breaking from the dollar’s hegemony, is supporting gold prices.
Ratings agency Moody recently lowered America’s credit rating outlook from stable to negative based on a steep increase in debt servicing costs as well as “entrenched political polarization.” According to Moody, its downgraded outlook was a reflection of the rising downside risks to America’s financial strength.
BMO Global Asset Management (GAM) notes that such developments resulted in the decoupling of gold prices from their historic inverse relationship with bond yields and pushed gold bullion prices to highs of up to $2,050 an ounce in recent months.
Pyle Wealth Advisory’s senior advisor and portfolio manager Andrew Pyle notes that these factors combined with a possible turning of the interest rate cycle and the U.S. Fed shifting gears ahead of potential cuts means investors should consider increasing their exposure to gold. Falling interest rates would likely result in a reduction in the value of the dollar and give gold an opportunity to rise, Pyle explained.
Gold-focused exchange-traded funds (ETFs) are especially great at gaining gold exposure because they often have ample liquidity and are easily accessible. ETFs allow investors to replicate physical exposure, Howard Wealth Management Group advisor Robert Howard says, especially ETFs that buy the precious metal and hold it “unencumbered” or without ties to other third parties.
Investors who invest in physical gold ETFs also don’t have to worry about factors such as labor, oil and margins, Howard says. Pyle notes that a 5% gold allocation is a suitable weighting for a balanced portfolio and advises investors to place gold at the periphery of their investment strategies. Choosing gold stocks such as Newmont Corporation (NYSE: NEM) (TSX: NGT) or going for gold bullion or even gold ETFs may boil down to personal preference and experience.
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