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Why gold is performing well right now?

While cyclical assets and the oft-cited safe haven of the dollar have started to struggle the traditional ‘port in a storm’ asset of gold has started to reclaim its place as the ‘true safe haven’ asset to which investors flee in times of profound market strife.

Traditionally the performance of gold and the dollar are inversely correlated, that is their values tend to move in opposite directions from each other, but the dollar can also perform well at times of strife.

Indeed one of the key dampeners on the performance of gold in 2015 was the strength of the dollar. Investors anticipated that the US economy would continue to perform well, and that interest rates would rise, both dynamics that are positive for the dollar, this sparked a surge to that currency from investors around the world seeking a safe haven.

But as 2016 brought a suite of questions as to the depth of the US economic recovery, and saw the US Federal Reserve, the body that sets interest rates, dampen expectations of significant action this year.

The consequence of that is the dollar has fallen by around 3 per cent this year, and US equities down 10 per cent and racked by uncertainty, the is no longer cradled by cautious investors as a desirable port in a storm.

In contrast, the gold price has risen by 10 per cent, to claim a sport as a ‘true safe haven, in the words of one prominent analyst.

This trend towards gold is exacerbated by the policies of central banks, particularly in Europe and Japan, to depreciate the value of their currencies, even to the point of pursuing negative interest rates, may prompt investors to buy gold as a store of value. Generally speaking, those central banks are trying to generate inflation in their economies, and gold is bought as a hedge against inflation.

The travails of many of the emerging markets this year, actually prompted in part by the rise in US interest rates in December, and the in part by the generally downward trajectory of commodity prices, may also prompt investors in those economies to try to reallocate some of their capital into gold. Another key attraction of gold for some emerging market investors is its mobility, that is, the fact that it can be transported to other jurisdictions easily, certainly more easily than can property, and cannot have its value annulled by a government, in the way that share certificates can be.

So uncertainty in developed markets, instability in emerging markets, and policy makers trying to generate inflation, all combine to mean that conditions should continue to be favourable for the gold price for the rest of 2016.

David Thorpe, Editor at What Investment

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