With US stock markets reaching more and more record highs daily and the growing threat of soaring inflation, investors should look at gold as a portfolio hedge and thus a hedge against purchasing power.
As we wrote earlier, while gold prices have struggled to show strength over the past seven months, precious metal plays a critically important role within a portfolio.
The point that we must keep in mind today is that the economy is improving thanks to a series of historically unprecedented stimuli even if this brings some consequences on a practical level.
Specifically, several factors could potentially lead to higher inflation and also put pressure on the US dollar, creating fertile ground for commodities, particularly gold.
As we have often observed throughout this blog, it would be prudent for investors to take some defensive positions in their portfolio to try to diversify the risk that excessive exposure to equity markets could put their savings at risk.
And even more so today, gold remains an important safe haven as real interest rates remain close to historically low levels.
The current situation is very different from the one that caused the financial crisis in 2007-2008 which was a systemic failure. This time, the economy was in good shape before the pandemic started. Also, the pandemic is a biological thing that will eventually dissipate and then the economy will recover again. It’s a different problem than it was 15 years ago.
And as a result, the solution that governments are implementing right now may not be the most correct one, and it is like putting fuel on the fire. And as a result, this is why we see more interest in physical gold.
But what is causing this disparity between the real price of gold and current spot prices is the impact of different investment philosophies: institutional versus individual investors who lack the sophisticated financial tools that institutions use to preserve the power of purchase.
The simple investor has now understood that if he wants to obtain the protection of purchasing power from the erosion of inflation, he must invest part of the capital in physical gold.
Another very positive sign for the gold market in 2021 is that central banks are buying back the precious metal. One of the main reasons behind their renewed interest in gold is its inverse relationship to the US dollar.
Hungary’s central bank increased its gold reserves to 94.5 tonnes from 31.5 tonnes in the first quarter, citing “long-term strategic economic and national policy goals”. This marked one of the most significant central bank gold purchases in decades.
This buying comes just as the WGC released a report claiming that global central banks were net buyers of gold in February.
While gold remains a defensive asset in a portfolio, investors may also consider other commodities as part of a diversified approach to global growth and recovery.
We must always keep in mind that commodities deserve their rightful place in a portfolio. They are a major piece in a well-diversified portfolio.
While we remain broadly positive on gold, the precious metal will still face significant risk from potentially higher interest rates. The Federal Reserve has noted on several occasions that the rise in inflation this year should be transitory.
The central bank also said it does not expect to raise interest rates until the US economy is on track for a full recovery and inflation has stabilized at 2%.
But what if inflation turns out to be much firmer than the central bank expects?
According to a statement from Fed Chairman Jerome Powell, “The Federal Reserve is monitoring inflation closely, and will have to act if it gets too high.” “It’s very difficult to pin down a timeline. But we believe a rate hike is on the horizon. “
In this current environment with so many unknown factors influencing investment strategies, the time has come for investors to get actively involved in how they invest and above all to remain disciplined.
So if we want to add gold to our investment portfolio as a hedge against risk, now will be the perfect time to do so.