Gold is traditionally used as safe haven investment to hedge against a falling market. As the USD dollar market continues to fall, the popularity of gold will continue to rise. The markets have recently been experiencing some very turbulent times of late as tension grows between North Korea and the United States. These factors will encourage investors to invest in gold stocks. Exposure of gold on the Australian stock exchange can be gained through ownership of gold stocks or Gold ETF’s.
These are the reasons why investors should now be looking at gold:
- Gold prices have trending up for a number of months now and are trading at almost a 2 month high. At time of writing, gold prices are nearly $1300 US per ounce.
- The last few days has seen a spike in the volatility index. High levels of volatility equate to higher levels of fear. Gold is popular in highly volatile times as it is seen as a stable investment. It can be argued that the Trump presidency will start to create market volatility and this instability will continue as long as he is president. Market volatility will drive investors to buy gold stocks.
- This new political tension with North Korea will set back Trump’s pro-growth plans to boost companies and the US economy. Investors are already losing confidence that Trump will be able to enact all that he has previously promised. This may placate the need to raise rates which is positive for gold stocks.
- The US dollar has softened as investors believe the Fed Reserve will not hike interest rates as originally expected. Gold stocks have an inverse relationship with the US dollar. When the US dollar is at its weakest, the price of gold stocks increases. Investors seek an investment such as gold which will protect them as the US dollar depreciates.
- The S&P 500 is at record highs driven by better than expected company profits. This means that the S&P 500 is now very expensive with a PE of 22.7x. The historical average PE is 16.5. Gold stocks are currently below their recent peak. The S&P 500 has already reached the peak and, for now, is falling. The S&P 500 dropped suddenly last week as the political crisis with North Korean started to escalate.
- If the Fed continue with their conservative approach to raising rates, gold stocks will continue to rise. Gold stocks tend to drop as interest rates rise but from the latest Fed speech, it seems like rates will not rise as rapidly as first thought.
- The low interest rate environment looks to linger on for some time. These conditions drive up the demand of gold stocks as investors move out of bonds and into gold stocks. Bonds in this low interest rate environment are only offering low yields so investors would rather invest in stable and higher returning gold stocks.
- Gold stocks in Australia worth taking a look at are EVN, SBM and NST. ETF’s include GOLD and the currency hedged QAU.
Lauren Hua is a private client adviser at Fairmont Equities.
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