Author: Amaraj Flora
Senior Portfolio Assistant & Investment Committee Support
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Published: May 2024
In recent months, the price of gold has experienced a significant surge, capturing the attention of investors and market observers worldwide, attributed to several key factors that highlight the importance of the precious metal. Gold’s recent rally to historic highs has been supported by the perfect storm of sticky inflation, reduced expectations of interest rate cuts, increased global demand, heightened geopolitical risks, and significant central bank purchases.
At the beginning of the year, central banks worldwide recorded the highest demand for gold on record, with public institutions adding 290 tonnes to their official holdings in Q1, led by significant purchases from China. The Chinese appetite for gold has likely been driven by domestic economic uncertainty, lacklustre stock market performance, and concerns over potential Western sanctions following geopolitical tensions with the USA.
Gold has traditionally served as a safe-haven asset during economic instability and market turbulence, particularly amid unprecedented fiscal and monetary stimulus measures aimed at combating pandemic-induced downturns. These measures have raised fears of inflationary pressures and fiat currency devaluation, further driving demand for gold as a store of value.
Geopolitical tensions and uncertainty – which show no signs of abating – have also contributed to driving up gold prices, widening the gap between real yields and gold even further. The weakening of the decade-long correlation between real yield levels and gold also reveals stronger structural demand. Escalating trade disputes, Brexit negotiations, and geopolitical conflicts have heightened risk perceptions among investors, leading to increased demand for gold as a hedge against uncertainty.
The surge in gold prices underscores the importance of including gold within client portfolios as a strategic diversifier and risk management tool. Gold’s historically low correlation with traditional asset classes makes it an effective diversification tool that can enhance portfolio resilience during periods of market stress.
Despite short-term price fluctuations influenced by market dynamics, gold’s long-term value proposition as a reliable asset for wealth preservation and portfolio diversification remains compelling. At MM Wealth, we have strategically invested in a physically backed gold ETC (Exchange traded commodity) to reduce overall portfolio volatility and mitigate downside risks during uncertain market conditions. This allocation underscores our commitment to prudent risk management and long-term wealth preservation strategies.
If you would like to talk to one of our Chartered Financial Planners, please contact us on 01223 233331 or email info@mmwealth.co.uk.
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Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments and the income from them can go down as well as up, and you may not recover the amount of your original investment. Furthermore, gold is not an income paying asset.
The information in this article is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.
The Financial Conduct Authority does not regulate estate planning and tax planning.
The information contained within this blog is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
