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Is it time to invest in gold Exchange Traded Funds (ETFs), gold savings funds or sovereign gold bonds, if available any?

Before, we address this question, it's imperative to know factors that are driving gold prices up.

Graph: Has a fresh up-move started in Gold?

Data as on June 28, 2019
(Source: ACE MF)

What's moving gold prices up?

1. Potential dovish stance of Federal Reserve (Fed)

2. Openness of European Central Bank (ECB) to fresh stimulus measures

3. Sharply rising geo-political uncertainty

4. Accumulation by many central banks

Why is Fed likely to turn dovish?

The difference between Federal Reserve's (Fed's) commentaries at two consecutive policy events narrates the whole story. The Fed recognises the risks to economic growth and it is prepared to take actions based on incoming macroeconomic data.

FOMC statement dated May 01, 2019

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes."

FOMC statement dated June 19, 2019

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective."

Fed has made future monetary policy decisions more information sensitive and showed its readiness to take a dovish stance if necessary. This has been good news for gold bugs. Falling interest rates make USD weaker and gold stronger.

ECB is preparing for another round of stimulus

At ECB's annual meeting in Portugal lately, ECB President, hinted at another stimulus. In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.

European policy makers are meeting on July 25, 2019 to decide the future course of action. Gold market is already expecting a further cut. This has been a notable shift from the market's assumptions towards the beginning of 2019-when experts were discussing the scope for rate hikes.

With ECB and Fed changing to show their flexibility to be more accommodative to growth concerns, reflects a gloomy picture for the world economic growth. The International Monetary Fund (IMF) has already lowered its 2019 growth forecast to 3.3% from 3.5% earlier. It has sent word to global policymakers highlighting trade war risks, rising debt levels, and inequality.

Geopolitical uncertainty is touching the roof

Be it the standoff between the U.S. and Iran, and/or the continued trade tensions between China and the U.S., global certainties are on the rise for sure. IMF has advised global policymakers to avoid "costly policy mistakes" and emphasized on finding a solution to existing conflicts. "There is a need for greater multilateral cooperation to resolve trade conflicts, to address climate change and risks from cybersecurity, and to improve the effectiveness of international taxation". The World Bank has slashed its forecast of global trade volume growth to 2.6% from 3.6% citing falling business confidence and tepid growth in investment demand in emerging and advanced economies.

Central Banks have become active in the gold market

According to a World Gold Council report, Central Banks of countries such as India, China, Kazakhstan, Russia, Hungary, and Poland, among others have been accumulating gold, albeit in small quantities for now. If the on-going trade conflicts and other geo-political uncertainties result in a currency crisis, central bank may become more aggressive in the gold market. It seems the gold market has started factoring in such possibilities as well.

What investors should do?

Gold as an asset class is an effective portfolio diversifier and a hedge. The long-term secular uptrend, exhibited by gold, is something that invites attention and highlights the importance of owning gold in one's portfolio with a longer investment horizon.

At PersonalFN, we recommend allocating at least 10% of your entire portfolio to gold and holding it with a long-term investment horizon. This will be a prudent strategy.

But buy gold the smart way, via: gold ETFs, gold saving funds, sovereign gold bonds, and/or e-gold. Remember, buying the yellow metal in paper form has many advantages, which you miss out on when you buy gold in the physical form.

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