The price of gold touched US$1300 an ounce earlier this month, up more than 20% since the start of this year and the highest level since January 2015.
Traditionally, gold has been seen as a hedge against inflation. Related to this is the idea that weaker currencies (particularly a weaker US$) tend to push gold prices higher, as buying gold is a way of protecting wealth when currencies are losing value.
One of the reasons gold prices soared after the global financial crisis was the decline in interest rates around the world, followed by substantial Quantitative Easing from the US Federal Reserve – and later other major central banks – which effectively made US$ ‘cheaper’ and reduced the returns that investors could earn on government bonds, or even on savings in bank accounts.
Another key driver of gold prices is fear – it is often seen as a safe-haven investment in times of turmoil. The uncertainty about the future of the Eurozone during the Greek debt crises and geopolitical developments elsewhere in the world helped push gold prices up to US$ 1800 an ounce back in 2011-12.
In December 2015, the Fed increased their official interest rate for the first time in nearly a decade, and a further three rate hikes were penciled in for 2016. The prospect of higher returns on bonds and other financial assets made gold less attractive to hold – after all, gold does not give you any income such as coupon payments or dividends, and costs money to store. Gold prices fell in November and December.
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But the renewed worries about global growth, the lack of inflation in any of the major economies of the world, and increased caution from the Fed in recent weeks means that investors are no longer expecting US rates to rise as quickly. The US$ has weakened as a result, and gold prices have responded as they typically do in such a situation.
Looking ahead, most analysts are cautious about further increases in the price of gold. The median forecast for the gold price (according to a survey of analysts by Bloomberg) is under US$ 1200 per ounce for this year, through to 2019. The main reason for this caution is the view that US interest rates are likely to move higher, albeit at a slow pace, over the next few years.
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Experts agree that investors should own some gold as part of a diversified portfolio of cash, stocks and bonds. How much is the ‘right’ amount depends on who you speak to, and your own risk appetite. Most advisers would suggest 5-10% of your portfolio should be in gold, and certainly no more than 20%. So while there is nothing wrong with buying some gold jewelry, do so for the pleasure of wearing it, not with a view to making a profit on your investment.
Kate Pennington is a freelance financial journalist. She studied Economics in the UK and subsequently spent several years working as an analyst in London. Kate is fascinated by financial markets and can usually be found reading the FT while drinking bottomless cups of coffee.