How to benefit from a falling gold market
Not so long ago in the summer of 2011 investors could not get enough of gold. It was the hot investment with the price skyrocketing to a record high of 1890.7 US dollars an ounce in August that year. Much of the rush to buy gold was instigated by the Eurozone crisis with speculation reaching fever pitch that Greece had gone bankrupt and was shortly due to exit the Eurozone.
With gold renowned as a safe haven investment, market participants engaged in furious gold purchasing as a way to protect against any significant changes that might negatively impact their wealth. This high demand for the precious metal pushed prices up to levels never seen before and not seen since.
While we may not have seen such high prices for gold since 2011, there are still advantages for investing in gold. Gold is primarily used within a portfolio as a type of insurance against losses suffered by other assets. Gold is uniquely renowned for performing independently of other asset classes, such as stocks, which makes it appealing when the stock market is falling. Likewise, gold usually strengthens in price as the US dollar weakens. In a balanced portfolio it is generally considered appropriate to allocate somewhere between 5% and 10% to gold investments.
But what about investing during a falling gold market? Gold can be traded in many different forms, the most commonly being physical gold (gold bullion), but one drawback of trading physical gold is that investors only benefit when the market is going up. However, an increasingly popular way to gain access to the gold market is to invest in Gold CFDs (contracts for difference) which allow investors to realise a gain from movements in the gold market regardless of whether the market is going up or down.
Gold CFDs are a derivative product which allow investors to take a position in the market and trade live market price movements without needing to own the underlying asset. By predicting whether the price of gold will rise or fall, investors can profit. It is this flexibility of having the chance to realise a gain from both upward moving prices by “going long” and also downward prices by “going short” that is behind the surge in popularity of Gold CFDs.
Purchasing physical gold will always have its advantages as a long term investment in particular because gold is renowned for maintaining its value over time and is a popular hedge against inflation. However, the advantage that Gold CFDs have over physical gold purchases is that you can trade much smaller lots than if you are purchasing the physical asset and you can also take advantage of short term volatility.
Another benefit of gold investments is that they can act as a strategic protection against currency valuation fluctuations. While the US dollar is currently riding high on the back of a progressive recovery leading to less safe haven demand for gold from investors, there is still good potential for gold to go higher. Not least due to a global savings glut that is increasingly being confronted by a shortage of traditional safe assets such as bonds where many safe bond markets are trading at negative interest rates.
In fact, the recent downward trend for gold may not be continuing for much longer according to Saxo Bank Chief Economist Steen Jakobsen who says gold remains top of his list for new investments: “We are in an “in-between period” – where the US will slow down and ultimately hand over the growth engine to emerging markets by the earliest in Q4-2015 but firmly in 2016. The problem is that emerging markets are not ready due to high US dollar debt and waning commodity prices and Europe is still too weak to contribute net to world growth leaving a growth vacuum for new growth.”
Regardless of whether the price of gold makes a return to strength or not, gold will perennially play an important strategic role in any balanced investment portfolio and is certainly not losing its lustre.
by Emmanouil Lemonakis, Head of Central Eastern Europe Region for Saxo Bank