We see enough factors supporting gold to justify a modest allocation in suitable portfolios. Gold is a difficult investment to forecast because of its many performance drivers and the dynamic nature of those drivers. But several relationships seem to hold over time; here we discuss those factors and make a case for maintaining some gold exposure in portfolios for the current macroeconomic environment. Despite the commodity’s 20% gain so far in 2016, gold may continue to shine and additional gains may lie ahead.
Gold’s Dynamic Drivers
At a high level, we see four primary drivers of gold prices: currency movements, inflation expectations, safe haven demand, and jewelry demand. We believe these factors capture the majority of the commodity’s price movements. In analyzing these indicators today, we see several positives:
· The dollar’s transition to a period of stability
· Low interest rates and a likely gradual Federal Reserve (Fed) tightening cycle
· Policy risks, both domestic and overseas
· Rising inflation
· Bullish technical analysis indicators
At the same time, gold faces several headwinds:
· Impending Fed rate hikes and potential stimulus overseas that may lift the dollar