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Gold Is Not A Magic Elixir But An Attractive Store Of Value

Kitco News

(Kitco News) - Some investors have been frustrated and disappointed in gold’s lackluster performance as a safe-haven asset during a time of heightened geopolitical instability, but one portfolio manager warns that investors might be expecting too much.

In a report, Wednesday, Trey Reik, senior portfolio manager at Sprott Asset Management argued that gold is “not a magical elixir, but it is a fiercely reliable store of value.”

Reik’s comments come as gold prices have been unable to break through critical resistance at $1,236 an ounce and continue to hover around last week’s 12-month lows. August gold futures last traded at $1,228.40 an ounce, up 0.24% on the day.

Reik presented a few factors that have been impacting the gold market with the first being weakness in the broad commodity sector. However, compared to the performance of other base metals, gold has held up relatively well, he said. He added that the Bloomberg Commodity Index (BCI) had dropped significantly since the U.S. government imposed tariffs on steel and aluminum imports and then imposed further $200 billion tariffs on a list of Chinese imports.

Base metals have been particularly hard hit as many investors have worried that global trade policies will lower global growth and reduce overall market demand. Reik noted that gold is a significant component of the Bloomberg Commodity Index

“Gold is currently the single largest weighting in the BCI, at 9.32%. In the very short run, therefore, gold is not immune to the magnetic pull of displacements in the commodity complex. In the context of 3%-plus declines in base metal prices on [July 11], gold’s comparatively modest 1.09% dip serves as a testament to gold’s non-correlating profile.

Reik added that gold’s role as a store of value could also be seen in its price action through most of 2017. He noted that there wasn’t a single day last year where the price change in the precious metal exceeded 2.5%. He added that gold’s 60-day volatility is currently at its lowest level in a decade.

“Of course, this type of price action is precisely how an effective store of value should behave,” he said.

The other major factor Reik said that impacts gold is of course the U.S. dollar. He noted hawkish Federal Reserve monetary policy continues to support the greenback, but the U.S. central bank might be running out of room to push interest rates materially higher.

He noted that markets are pricing a greater chance of a rate cut in 2020 than a rate hike.

“We expect the U.S. dollar strength which has weighed on gold’s performance in recent months to dissipate during the second half of 2018,” he said. “Fed tightening is already pinching global liquidity and projections for a year-over-year $300 billion increase in second-half Treasury issuance will refocus consensus on grim realities of the deteriorating U.S. fiscal position. The domestic economy is not all it is cracked up to be.”

Looking ahead, Reik said that the current gold prices appear to be a good entry point for investors looking for important diversification.

“Given the array of fundamental challenges in the contemporary investment landscape, we are confident today’s gold price will soon prove to have been an especially prudent investment proposition,” he said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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