“Despite its historically high price, we believe that gold remains a safe haven and a good diversification tool at a time of high geopolitical tensions and excessive government debt.”
- Gold prices touched record highs in August, outperforming the S&P 500 year to date (as of 29 August).
- This is driven by multiple factors such as geopolitical tensions, expectations of Fed rate-cuts and demand from China.
- We could see near term volatility given gold’s high valuations, but from a long term view it remains attractive.
Gold touched new highs in August on the back of its safe haven appeal amid continued geopolitical tensions in the Middle East and the Russia-Ukraine war. In addition, recent weakness in the dollar (gold is priced in this currency) and expectations from the Federal Reserve to reduce interest rates, also boosted sentiment. Falling yields on US Treasuries provides additional incentive to hold the metal, which is a nonyielding asset. A long term support for gold prices is likely to come from high public debt and excessive fiscal deficits (government spending more than its income) in the US and Europe. Both these factors put pressure on government-backed currencies. Consequently, investors are encouraged to seek shelter in the safety of the precious metal as a store of long term value.
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