In 2016, Brexit set fire on gold and ignited a rally in gold price. In 2017, it was newly elected US President, Donald Trump who ignited an unexpected gold price rally with his controversial policies. Should wealth builders buy gold bullion now?
In my own opinion, every leader is entitled to defend his country’s national interests. Whether Donald Trump’s policies, which have been viewed by many critics as being protectionism, will lead to a stronger United States is subject to debate.
But Trump’s actions certainly create a lot of market uncertainty. And one of the things that investors hate most is uncertainty. Due to this, investors flee for safety and buy gold bullion. Since Donald Trump took office, gold price has rallied to USD1233 per ounce. On the current form, gold price is certainly very bullish and looks to rise further in the short-term.
Based on data released by World Gold Council, gold has a mixed performance in 2016. While the price has recovered from a low of USD1067 per ounce since end 2015, demand for gold bar and coin has dropped by 2% year-on-year. This is because many investors has been put off by the high price of gold in 2016.
The big players, namely the central banks, have also bought fewer gold bullion in 2016. Demand fell by 33% to 384t for the year. Despite this, 2016 was the seventh consecutive year of net purchases by central banks.
In my point of view, it is unlikely that the current gold price rally is sustainable in the long run because the Trump effect will likely to fade in a couple of months. The interest rate hikes by US Federal Reserve should have a more influential effect on the direction of the global stock markets and gold price. Typically, interest rate hikes would result in a correction in gold price because of the opportunity cost of holding gold bullion.
The interest rate hikes, coupled with the political uncertainty and slowing global economy, should see gold price hovering between USD1200 to 1300 per ounce. This is some way off the peak of USD1800 per ounce seen in 2012. Thus, from the long-term perspective, there is still a lot of potential for gold price to increase further if wealth builders purchase at current valuation.
As a wealth builder, it is important to diversify our portfolio in different asset classes. Traditionally, bonds are seen as a good way to diversify risks but with interest rates increasing in recent years, bonds may not be a viable solution for risk diversification. Nowadays, gold bullion is being regarded as a mainstream investment instrument to diversify risks in portfolio.
Another signal to buy into gold is when the stock market has peaked. Recently, the Dow Jones has crossed the historic milestone of 20,000. This is a record for the US market and it reflects a lot of greed in the stock market. A market correction may be on the card and perhaps it is time for investors to calibrate their risk appetite and avoid being too bullish in shares investment.
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