Why Am I Increasing My Exposure To Gold

Thinking Ahead - Why Is It The Time To Allocate Part Of Your Portfolio To Gold

3 September 2020

Gold does not pay any dividents, nor does it pay any interest. Neither Gold grows in mass, nor does it give you a harvest. You cannot eat gold either. It has no use except a very limited applications in electronics etc. So why do we love gold so much? Why has it recently been making new record highs against all major currencies? Well, why there has to be a rational explaination of everything? Somethings are just as they are, and always have beenm, and that is fine. Our love for Gold is embedded in our nature for as long as we know our history.

Current reasons to switch to Gold

It's the Time to Get Ready for Inflation

Thanks to quantitative easing across the global economies, inflation is going to be a much bigger issue in the foreseeable future than it has been in the recent years/decades. Even the US Faderal Reserve Bank has been clear and open about their policy to keep inflation levels higher than we have been used to in the recent past. Over the last many years inflation has generally been well below the Fed's target rate of 2%. Not only that now Fed aims it to be above 2%, but this terget is for an average inflation rate over a number of years. In other words Fed is gearing up to drive inflation well above 2%, with an aim to achieve a multi year avaerge just above 2%. So the Fed will be perfectly happy with a mich higher rate of inflation, as long as the long term avaerage is slightly above 2%.

Currently Gold is the best Hedge Against a Stock Market Correction / Crash

While no complaints against the stock markets with S&P-500 registering a new record high almost every day on the back of the quantitative easing and the economy flooded with cash, the market is currently in an extreme overbought state and a corrective dip may be just around the corner. Usually bonds provide a good hedge against a stock market decline but currently the bond market is yielding nothing. Switching to bonds does not make sense given the fact the bonds do not provide any guard against inflation. Therefore the only logical hedge against a stock market decline, either a short or long term, is gold which provides added defence against inflation.

Gold / Stocks Ratio Seems Poised For A Rally

Late 2018 saw the Gold/S&P500 ratio reach a 13 year low. Since then Gold has overall outperformed the S&P500 index. In March the ratio confirmed a 2 year bullish structure and triggered an initial breakout rally. With the overbought conditions now unwound and the ratio currently hovering above some solid support levels, scope is for a renewed strength in the near future.

Gold Has Been Making New Record Highs

Since the President Nixon completely abandoned the gold standard in 1971, gold has seen two impulsive up-waves. The first wave saw the gold price rally from $100 to $873 (1976-80) and the second wave $252-$1921 (1999-2011). The recent break above the 2011 peak suggests the third impulsive wave has been unfolding from the 2016 trough at $1046. It is a bit hard to project the long term Gold price target based on this information, but should the current trend continues to unfold, we may see Gold at $3000 an ounce or higher in the next few years.

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