2016 has thus far been characterised by the high level of uncertainty across global stock markets. The FTSE 100 has fallen by 8% since the turn of the year and could realistically fall further due to investors’ fears surrounding the oil price, US interest rate rises and the slowing down of China’s growth rate.
However, since the turn of the year the performance of gold has been relatively strong. Its price has increased by 10.7% year-to-date and a key reason for this is a view among investors that gold is a store of wealth.
Of course, this viewpoint is nothing new. During periods of great economic uncertainty gold has proved popular. That’s because gold can be viewed as a low-risk asset that will always have a value, even if asset prices fluctuate, inflation soars and financial Armageddon does come into being. That’s why during the credit crunch the price of gold soared, leaving many holders of equities wishing that they’d bought the precious metal rather than their shares.
Will the price rise?
Looking ahead, there are obvious potential catalysts to push the price of gold higher. For example, a further slowdown in the GDP growth rate in China could spook investors into thinking that a global recession is on the way. Similarly, further falls in the price of other commodities may hurt investor sentiment yet further and cause a more risk-averse attitude. And with the uncertainty that pervades world markets at the present time, a rise in US interest rates seems less likely than it did a couple of months ago, which would be good news for the price of gold.
However in the longer term, the gold price may be held back somewhat. The current level of uncertainty won’t last indefinitely and when it fades away, US interest rates are likely to rise. This would hurt gold since, historically, its price has moved inversely to interest rates due to it being a non-interest-producing asset. In other words, other assets that offer an income yield become more attractive at higher interest rate levels when compared to gold’s lack of income, thereby causing the price of gold to come under pressure.
So, while gold could prove to be a good counterbalance to further share price falls in the coming months, in the long run its lack of income prospects and the potential for its price to come under pressure mean that it may not be an optimum investment.
However, buying shares in companies that produce gold could be a sound move. Why? Many of them are trading on relatively low valuations due to generally weak sentiment within the resources sector. And with a higher gold price and costs having been slashed, as well as the scope for increased production, there’s the potential for rising profitability and rising share prices among multiple gold producers in 2016 and beyond.