“WINTER IS COMING”

As we grow Clients’ money, Unicorn has always invested with a prudent and conservative hand, and thus would prefer not losing money than to put money in instruments that promise results that are too good to be true.

It is with this prudency in mind that we started to allocate more funds for Clients into Capital Preservation, which included Gold.

That was in Feb 2016; and it has started bearing fruit in the recent months.

Wood is required for the fire that keeps you warm – especially in winter. Keeping gold in your portfolio is akin to stocking up on wood for winter (recession). Historical data suggests that the price of gold tends to be a reasonable hedge against most of the major crises in U.S history. In 2009, the price of gold rose about 24% following the worst financial crisis since the Great Depression. Presently, it has gone up more than 15% since late May1.

We had advised the allocation to gold because of the following reasons:

  1. Safe Haven – Hedge against inflation
  2. Supply of and Demand for Gold
  3. Attractive Valuation

Let’s explore which had prompted gold price to appreciate most recently, and subsequently also grew your portfolio.

 

  1. Safe Haven

Even though the markets have currently recovered, Gold’s appeal as a safe haven asset increases in times of uncertainty. This is because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline2. In May, as the trade war negotiations broke down, Huawei landed on the “entities blacklist, and Trump announced that he might impose a tariff on ALL Chinese goods3”; a rout in global equity markets lent support to gold price as the latter became less costly to keep.

 

  1. Supply of and Demand for Gold

China, India and the other central banks have also been adding gold to their vaults.

“In the first half of this year, central banks bought 374 metric tons of gold, reported the World Gold Council. That was the largest net increase for the first half of the year since at least 2000. China’s central bank has been adding to its gold reserve for eight straight months since December, scooping up another 10 metric tons of the yellow metal in July, according to data from the People’s Bank of China4.”

 

  1. Attractive Valuation

The price of Gold went up about 2.5 times in the last crisis, when the US started printing money. And the Federal Reserve had mentioned that Quantitative Easing will be part of their “normal” fiscal policy, which probably meant that it would be utilised even when there isn’t a crisis. The demand for gold could also be in anticipation of money-printing as the value of dollar will drop whereas for a safe haven asset like Gold, the price will probably rise.

“Low interest rates and slowing global growth are helping gold stay well bid4.” As expected, on 30th Oct, “the Federal Reserve lowered the target for its benchmark rate by a quarter point, to a range of 1.5% to 1.75%. The move was the third cut in four months. The decision comes as US economic growth slowed to an annual rate of 1.9% in the most recent quarter5.”

We still believe that the above holds true, and in the current climate, still a good opportunity to buy more gold.

 

References:

  1. Yahoo Finance
  2. Investopedia
  3. South China Morning Post
  4. CNBC
  5. The British Broadcasting Corporation (BBC)


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