The markets are up and down at the moment and the investment world feels a little unstable. So is now a good time to get back into gold? MM, Dubai.
The expert advice:
Arjuna Mahendran, chief investment officer at Emirates NBD Wealth Management
Gold as an investment plays different roles for different customer profiles. For most investors it is a long-term investment usually in the form of jewellery, sovereigns and such like which are handed down through the generations. But with the sharp moves upwards in gold prices in the past decade, several investors ranging from individuals to large sophisticated hedge funds have started speculating on gold prices.
We think the fundamental driver of gold prices is market expectations about inflation. When markets are worried about rising consumer prices, as was the case in the post-2004 years when oil prices surged and drove up global prices of consumer products, gold prices also surged. This is because gold has historically been the best store of value when inflation has been high.
However, after the global economic crisis of 2009, gold lost its lustre. Even though markets initially predicted that quantitative easing by major central banks would usher in a new era of high inflation, this has not happened. Rather, real wages in the US, Europe and Japan have stagnated as industrial jobs have increasingly migrated to China and other emerging markets.
Also, the emerging markets themselves have slowed. China’s growth has slowed from a peak of 12 per cent GDP growth to 7.5 per cent today. India’s growth has slowed from 8 per cent to 5 per cent. As a consequence prices of oil and metals are sliding.
So there doesn’t seem to be any sign of inflation rising around the globe. This means gold prices are unlikely to rise in the medium term.
However, there is a possibility that as the global economy recovers, inflation could become a threat. A key driving factor could be the growth of military conflict across the Middle East, which could suddenly affect oil supplies from the region.
We think that the low point for gold prices could be about US$1,100 per ounce. This would be a good price at which to buy gold with a view to keeping it as a form of insurance against price inflation. As a rule of thumb, we think about 5 per cent of a long-term investor’s overall portfolio should be invested in gold. For a short-term trader in gold, we expect that gold’s current trading range is $1,260 (minor resistance) and $1,120 (minor support) and the major resistance is $1,320 and major support is $1,080 / $1,050.
The reader’s advice:
Mohammed Ibrahim, Abu Dhabi
Why would anyone buy gold at the moment when a lot of cheap stocks will also give you a dividend? When you buy gold you will also have to pay money for its storage or expose yourself to risk if you keep it under your mattress. Plus the global economy isn’t doing so well and inflation is low, so the price of gold is likely to remain depressed for a while until things heat up a bit more.
In the meantime you may be missing out on other opportunities that will give you a dividend yield, either in the form of bonds, stocks or real estate investment trusts. Buying commodities like gold seems to me to be a form of gambling because it’s much more difficult to guess demand and supply and you are not getting anything in return while you wait. If you’re really keen on gold, why not consider buying the shares of gold miners, either individually or more simply through an exchange- traded fund that bundles together dozens of these firms, therefore reducing your risk?
But I guess if you are buying gold because you think the end is near, then I suppose that may not be a good option. A walk around the park may do you more good.
The next Money Clinic
Every month I sent 60 per cent of my salary home to the US. Until now, I have used my bank to make the monthly transaction but I have heard that some online foreign exchange houses offer expats a better rate and will not charge any fees. Can you tell me how this works? NB, Abu Dhabi
Every three weeks The National features a reader’s personal finance problem. If you have an issue or would like to suggest a solution for another reader’s concern, write to pf@thenational.ae
The advice provided in our columns does not constitute legal advice and is provided for information only.
