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OPINION

Dull but worthy

Dull but worthy
November 6, 2014
Dull but worthy

First the shiny stuff. Should those of us who own gold be selling? It would, on the face of it, appear to be a safe option. Since peaking at $1900 an ounce in September 2011, its price has slid 40 per cent to the current $1141, a level not seen since mid-2010 and, for those of the technical analysis bent, smashing through various levels of support over the last few months. So, not so shiny at all at the moment.

And there are many fundamental reasons to suggest the slide could continue, too, not least the end of quantitative easing (QE) in the US. Of course gold’s bull run began long before the financial crisis and the unleashing of huge monetary stimulus in 2008, but subsequent fears of an inflationary spike caused by 'money printing' kept the yellow metal motoring higher. It naturally follows, then, that as policy tightens again - and the prospect of inflation subsides - gold should fall.

Goldbugs may argue, however, that we haven’t seen the last of QE - Japan continues its large-scale monetary stimulus and the European Central Bank looks increasingly like it needs full-blown easing in the form of government bond buying if it is to fend off economic crisis. The market at large, though, is still betting that Germany will continue to forestall such action, and that deflation remains the bigger threat - not an environment especially supportive of safe-haven assets such as gold.

As it happens, history suggests that oil is in fact the better inflation hedge - and its 27 per cent slump since July to its lowest level in five years also suggests inflation fears have been well and truly kicked into the long grass. Certainly the role of oil in the global economy means, at $81 a barrel, many things are becoming cheaper, from food to fashion to flights.

But, as we discussed on our new podcast a few weeks back, we should not be complacent that the events that have conspired to cheapen oil - rising US supply and slowing global growth - will continue, or that geopolitical events won't constrain supply again and see energy inflation roar back.

That’s one reason why I haven’t legged it down to Cash Converters to trade in my sovereigns. Another is that, as I explained last week, I am a strong believer in the long term benefits of asset allocation and as a result am quite happy to own an uncorrelated hard asset in my portfolio. Even if gold isn't performing that well right now, I have other assets that are. And when the market lurches towards risk-off mode once again - which, given the many unresolved problems the global economy faces, I am sure it will - I'll be happy to have the insurance gold offers.