Gold prices have found a new pocket of opportunity

Louisa Bojesen
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Americans Invest In Gold
Gold has risen since the beginning of the year (Source: Getty)

"Don't gain the world and lose your soul; wisdom is better than silver or gold.”

You may have to read the quote more than once, but Bob Marley knew what he was talking about.

At the moment, investors seemingly disagree a bit with him, and they have pushed spot gold up around 8 per cent higher since the beginning of the year.

A lack of wisdom among those with a desire to hurt others has meant the safe haven trade has found a new pocket of geopolitical opportunity.

Nobody sane wants more people to die in Syria, and nobody sane wants to start a war with North Korea. But handling both these hotspots is easier said than done, and this is proving the case with the new US administration just as it was the old.

The potential for deflation is a thing of the good old days (like 2016), but even with the inflation gods sprinkling inflation dust, gold as an inflation hedge is not the only reason to buy the metal.

Read more: The rising inflation tide can still lift US asset boats

Kieron Hodgson, a commodity and mining analyst from Panmure Gordon & Co, says that despite having a bullish outlook for the US dollar, all the other factors are in place to push the gold spot price higher.

He lists economic uncertainty (the triggering of Article 50, French elections, Chinese debt levels), concerns over high equity valuations (the UK now has all 10 industry groups returning positive five-year rolling performances for the first time), trading positions (short positions peaked around the recent US rate decision and then collapsed when the conversation switched to deleveraging the Federal Reserve’s balance sheet), central banks (they are now marginal buyers of gold for the first time since 2012), and indeed the pickup in inflation as being the main issues that should continue to support the price of gold.

Hodgson says that the long-term trend of lower gold prices that has been in place since 2011 will come to an end due to gathering risks, which could impact record high equity markets and lead to a correction.

Read more: Six reasons why US stock markets are set to tumble

Panmure Gordon isn’t waiting, and has upgraded its gold price forecast to $1,300 per ounce (from $1,225 per ounce) for 2017.

For 2018, they also see a rise to $1,350 per ounce (from $1,200 per ounce).

Hodgson thinks gold investors are likely to benefit from the risk of contagion linked to Brexit and US inflation being pushed up by Trumponomics.

If you have enough metal in your life, and prefer good old companies, Hodgson has a buy on Polymetal, Centamin and Randgold Resources. He also carries a hold recommendation for Acacia Mining.

In closing, here is something to remember for the next time you are sitting across from somebody wearing a nice piece of gold jewelry (courtesy of ThoughtCo: Interesting Gold Facts). Nearly all of the gold on Earth came from meteorites that bombarded the planet, over 200m years after it formed. Trippy, eh?

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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