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Coronavirus is having a major impact on the global financial markets. As a result of the notable increase in market volatility, many clients are choosing to invest in gold. Below we explore five reasons why you may wish to consider introducing gold into your portfolio.
Quantitative easing is a monetary policy whereby a central bank buys government bonds or other financial assets, in order to inject money into the economy to expand economic activity. According to Fitch Ratings, quantitative easing asset purchases are likely to hit a total of $6 trillion in 2020. For some context, this $6 trillion equates to almost half of all QE efforts made between 2009 and 2018.
History shows us that when central banks apply an aggressive quantitative easing strategy leading to a monetary oversupply, gold valuations thrive.
Investors are currently operating with an air of caution caused (in part) by high levels of market volatility and fears of a global recession. Historically, gold usually makes significant gains in times of political and economic uncertainty.
The general rule is that gold is seen as an alternative ‘currency’ to the dollar, so, when the greenback does badly, bullion does well. Oversupply of USD from large scale asset purchases by the Fed would drive the currency lower, while low rates would support higher prices of gold.
Whilst central banks around the world scramble to inject money into the economy, simultaneously increasing the volume of currency and decreasing its value, gold is doing the exact opposite. Social distancing measures have disrupted the production of gold, notably by reducing levels of mining, refining and distribution. This reduction has led to the perception of tight supply. Although temporary, these dynamics will be supportive of gold prices in the short run.
The key to portfolio diversification is finding investments that are not closely correlated to one another. Gold has historically had a negative correlation to stocks and other financial instruments meaning that in periods when the stock market performs badly gold will often stabilise an investor’s returns.