Gold
Gold
Deemed as the ultimate store of value Gold has been in demand over the last year, rising by almost 30%, but what are the key drivers of the price?
- Interest rates - as Gold pays no interest or dividends and returns are only from capital growth, when interest rates are low holding Gold becomes more attractive
- US Dollar - Gold tends to have an inverse relationship to the dollar; a rising dollar tends to result in a fall in the Gold price and vice versa (but not always!)
- Stock Market - volatility in the stock market also plays its part; large declines in stock prices typically result in a rise in the Gold price giving it diversification properties
At present it seems that conditions are primed for strong performance from Gold with interest rates stuck at ultra-low levels, a strong possibility that we may see the dollar depreciate and an over valued stock market.
The chart to the right shows us that when the ratio of Gold/S&P 500 falls below the price of Gold (stocks have been significantly outperforming the precious metal) its a good time to increase your allocation.
It seems at present the only risks are rising interest rates that remain at multi-year lows - the only place for these to go is upward - but with weakening economic conditions, large debt levels and relatively benign inflation that may be some way off yet.
