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OPINION

A glister of hope

A glister of hope
November 22, 2018
A glister of hope

In fact, amongst the market carnage, gold is proving one of the few bright spots right now – up nearly 5 per cent since August – even if its own safe-haven status has been called into question this year. A couple of months ago, a long-standing reader suggested to me that we should pay less attention to gold because private investor interest was waning, partly as a result of the rise of crypto, but also because they were interested in more speculative ideas including FAANG shares.

I don’t entirely disagree with this reading of the market. Far from acting as a store of value, gold has lost a quarter of its value in dollar terms over five years. True to our reader’s analysis, gold-watchers have suggested that falling demand for the metal has been partly the result of a rising appetite for risk assets – indeed, looking at gold’s recent chart, we can see that its continued decline until mid-summer has demonstrated a neat inverse correlation to risky tech stocks. The relationship also applies quite neatly to the direction of US interest rates and the resultant strength of the US dollar – as Alex Newman points out, why hold an asset that produces no income when the next best thing (US Treasuries, not bitcoin) pays you an increasingly decent coupon?

One answer could be that the comparison is inappropriate; while gold may not generate an income it could still nevertheless offer an opportunity to earn speculative returns that government bonds may not, especially if the current bout of risk aversion deepens. And there are plenty of reasons why that may play out. This week the Organisation for Economic Co-operation and Development (OECD) revised down its expectation for 2019 growth from 3.7 to 3.5 per cent, blaming rising trade tensions around the world. Should trade squabbles escalate into a trade war, 0.8 per cent could be wiped from global GDP by 2021, it says.  

That such a scenario is even seen as a possibility is a worry in itself, pointing to collapsing trust in political leaders to protect – or, as 'populists' would argue needs to happen, in some way improve – the so-called rules-based international order that has underpinned much of the world’s prosperity in recent decades. Should a hot summer of political turmoil gives way to a long political winter, which could prove fertile ground for renewed interest in gold as an insurance policy.