Gold: Should you buy or sell?

Katherine Denham
Gold bars are displayed at Shinhan Bank
The precious metal has not lost its shine yet (Source: Getty)

Gold is a sacred asset to investors when times get tough. But despite the UK election sending shockwaves across the country, investors have been selling the yellow metal rather than buying. So what should you be doing?

The spot price of gold hit a seven-month high in the days before the 8 June election, reaching $1,294 an ounce before tumbling by almost 3 per cent in little over a week as the Conservative coalition with the DUP reared its head.

Geopolitical turmoil often acts as a springboard for gold prices as investors use it to cushion their cash against potential risks in the market.

Read more: Gold investing had its best January in five years as "risks become reality"

But while gold is often viewed as a safe trade, the political turmoil in the UK over the past fortnight did not ratchet prices higher. Nor did other significant events that have transpired over recent weeks, such as Saudi Arabia’s decision to cut ties with Qatar, the testimony given by the former director of the FBI James Comey to the US Senate, and the continuation of the Greek debt saga.

Figures indicate investors have been selling out of the safe haven asset, with online trading platform BullionVault seeing four times the usual volume of trade after the UK election exit polls were published.

UK election overshadowed by the Fed

ETF Securities has seen outflows of $76m from its gold exchange-traded funds since 6 June. Commodities strategist Nitesh Shah says gold tends to be the first port of call during times of investor anxiety, which was expressed in the run-up to the General Election.

Yet there was no adverse reaction in equities or bonds after the event, and while sterling depreciated, the impact was contained. As a result, Shah says gold positions – which had been ramped up by investors in order to hedge against market dislocation – began to unwind, with expectations of rising interest rates in the US overshadowing the UK election results.

“With the absence of shocks, we expect gold prices to grind lower,” he says. “But that downside risk will be contained by the gradual nature of rate increases.”

ETF Securities predicts the price of gold will shift downwards to $1,230 by the end of the year as the US Federal Reserve slowly normalises interest rates. Bearing in mind real yields and gold prices usually move in opposite directions, this gradual increase in rates means gold is unlikely to embark on a sudden and steep fall in prices.

It’s also unlikely the value of the US dollar – which is often inversely correlated to the price of gold – will gain traction anytime soon due to the disappointment over the delivery of pro-growth policies promised by Donald Trump.

So while the price of gold looks likely to fall, there is a buffer in place to stop it veering off a cliff.

Gold is an insurance policy

But is there a case for buying gold right now? Investment experts would say there is.

Jon Gumpel, who oversees Brooks Macdonald’s Defensive Capital fund, says gold is still a good insurance against other asset classes, which look pricey when compared to the precious metal.

There is also the chance that geopolitical events might unfold which could shake up the equity and bond markets, prompting a fresh rally in gold prices.“The UK is very much at the focal point of political instability with Brexit talks now underway, so there is every chance of sterling being quite volatile, which means holding some gold is potentially a means of reducing exposure to the pound,” Gumpel says.

The fund manager urges investors who are thinking of selling out of gold to consider what alternatives they have, and whether there is another asset class available with similar attributes to gold.

“Gold is an insurance policy, but no one really wants it to do well because it’s an indication that things are still not well with the global economy. Who can tell if gold is cheap or expensive? But what we do know is that everything else is very expensive.”

Gold is largely uncorrelated to most other asset classes which makes it a sturdy investment for diversifying. Certainly the consensus among experts is that investors should always have a small chunk of money invested in the metal, and Helah Miah, investment research analyst at The Share Centre, recommends investors allocate between five and 10 per cent of their total assets to gold.

Inflation protection

Gold acts as a safeguard against rising inflation, which makes it even more appealing compared to other safe assets that don’t offer this same protection, such as US Treasury bonds. So as inflation has gained momentum over the past year, some investors have been taking long positions in gold. Online trading firm IG says its investors have tended to buy gold rather than sell over recent weeks.

According to chief market analyst, Chris Beauchamp, many investors expect this short term drop in the gold price to reverse, suggesting the move higher will reassert itself. “The biggest risk is a sudden fall in inflation or a Fed that turns much more hawkish later in the year, but for now the outlook seems clear for another run at $1,300,” he says.

So while gold has taken a bit of a tumble in recent weeks, the geopolitical storm shows no signs of settling anytime soon, meaning the precious metal should retain its shine this year.

Until the storm passes, traders would do better to buy gold, rather than sell.

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.