Is gold THE investment of 2016?

Suddenly there’s a real buzz about gold. There’s something about the ancient precious metal that taps deep into human psychology, and it doesn’t take much to get gold bugs flying again. 

Golden year

There’s something about George Soros that taps deep into investor psychology as well. This is the man who famously broke the Bank of England in 1992, and holds an estimated $24bn fortune, which always commands attention. Soros recently bought bullish options contracts on 1.05m shares in the SPDR Gold Trust, that tracks the price of bullion, and took a $264m stake in the Barrick Gold Corp. So why the sudden razzle-dazzle?

Gold is still seen as the ultimate safe haven and the market sell-off in January inevitably had many investors running for safety. Declining faith in fiat currencies also plays a part, as countries around the world engage in competitive devaluations in a bid to prop up their ailing economies. As has the weaker US dollar, with gold priced in the greenback. In the UK, gold has been given added shine by uncertainty surrounding the Brexit referendum. 

Gold rush

The gold price is up almost 18% this year, from $1,060 to today’s $1,248. UBS Solactive Pure Gold Miners ETF, which tracks the performance of a basket of global gold miners is up by 102%, while all five ETFs that follow the gold-diggers have risen at least 75%, according to broker AJ Bell. Stockbroker TD Direct Investing has seen a 24% increase in customers investing in the commodity and says the Blackrock Gold & General, previously a minority taste, is now its third bestselling fund of all. 

As economic fears deepen, the political centre weakens and Donald Trump happens, the growing attraction of gold is understandable. Some experts say that investors should always hold 5% to 10% of their portfolio in gold, for balance and diversification. That makes sense, although it’s something I’ve never bothered with myself.

All that glisters…

If you’re tempted to speculate on gold, remember that’s exactly what you are doing, speculating. For a supposedly safe haven, the gold price can be shockingly volatile. Rather than a store of value, gold is primarily a play on swings in market sentiment, with the price soaring when investors are fearful, then plunging when they get greedy again. During the 2011 eurozone crisis gold peaked at $1,889 amid talk of the price hitting $3,000 or $4,000. Instead, it dropped towards $1,000. So be prepared to take a capital hit.

There are good reasons why gold may rise higher. Supply is likely to tighten as new seams deep below the earth are harder and more costly to mine. And demand from China and India should remain strong. Personally, I’m in a bearish mood and expect more turbulence over the summer (although not from Brexit, the IG Binary is now 78% for Remain), but I’m still not buying gold. I’m buying shares because I expect them to rise over the longer run, and with the FTSE 100 yielding 4%, I get a juicy income stream if they don’t.

With gold there’s no income and the price really could go anywhere from here.