There are fears that the massive monetary and fiscal policy stimulus plans that have been pumped into the global economy will generate inflation.

Gold acts as a hedge against such an eventuality.

Dr Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors, said gold is seen as a good alternative to paper money.

‘While there are fears about the future of the US dollar, the outlook for other major currencies is not much better,’ he said.

‘Europe’s economy looks worse than the US, the strong yen looks unsustainable given the damage it has already caused the Japanese economy and the (Chinese yuan) is not really an option as it’s not convertible.’

A convertible currency is one that can be quickly and easily bought and sold for other currencies.

Diversification advantage

Many studies show that gold prices generally move in the opposite direction from stock prices: Gold soars when stocks tank.

‘Portfolios that contain even a small allocation of gold are proven to be generally more robust and better able to cope with market uncertainties than those that do not, showing improved stability and predictability of returns,’ said Mr Albert Cheng, managing director of World Gold Council for the Far East region.

He said the optimum investment in gold for any long- term institutional investment portfolio ranges from 4 per cent to 10 per cent.

Rarity factor

Governments can print as much money as they like – to pay off their debts – but they cannot create gold, which is limited in supply.

‘In all of history, only 161,000 tonnes of gold have been mined. This is barely enough to fill two Olympic-sized swimming pools, and of this amount, more than half was extracted in the recent 50 years,’ said IPP Financial Advisers investment director Albert Lam.

Outlook for gold

Despite the risk of prices reversing in the short term, financial experts say investors should add gold to their portfolios if they have not already done so.

‘Worrying too much about short-term pullback risks missing the bigger medium-term picture which remains very positive for gold,’ Dr Oliver said.

One key reason for gold’s rise is that central banks in emerging countries such as China and India are becoming buyers as part of a strategy to reduce the exposure of their foreign exchange reserves to paper currencies.

In the past, central banks focused on accumulating paper money such as the greenback, but they now want to hold more gold for diversification purposes.

‘Over the past five years, central banks and governments have sold around 440 tonnes of gold every year,’ Mr Schnider said.

‘In the coming years, central bank gold sales should come to a halt. In fact, we actually foresee that central banks may become net buyers.’

But experts also caution that investing in gold is highly speculative and prices can be volatile. After rising to new highs in 1974, gold prices plunged, falling to about US$100 in mid-1976 from about US$200 at the start of 1975.

‘Animal spirits can play a huge role in the determination of the gold price. This can make for a volatile ride over time and suggests that gold should not dominate an investor’s portfolio,’ Dr Oliver said.

Animal spirits – a term coined by the late British economist John Maynard Keynes – refers to a particular sort of confidence, or ‘naive optimism’.

Rather than dabble in gold alone, Dr Oliver suggested that investors have exposure to a broad basket of commodities.

Mr Shrikant Bhat, Citibank Singapore’s head of wealth management, urged investors to understand the factors driving the gold price movement and then take a view on whether those factors will continue to drive the demand.

This article was first published in The Straits Times.

About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

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