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Published On: Tue, Feb 28th, 2017

Is the Safe-Haven Premise of Gold still Valid?

Warren Buffet once voiced some concerns about the wisdom of buying gold as an investment. He said, “gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” Hence, it is not surprising that many investment- managers look down on gold in order avoid the biblical allusion of the servant that buried his ‘talents’.

However, it seems that money managers are starting to warm up to the idea of having gold in their portfolios. Contrary to what critics believe, investors generally agree that gold is a safe haven asset that provides investors with a measure of stability in time of economic and geopolitical uncertainties. Interestingly, many money managers are now starting considering gold a safe haven against sweeping tide of populism, protectionism, and stagflation, and inflation on the global economy.

photo/ Steve Bidmead via pixabay

Wall Street is starting to show some love to gold

It seems that Wall Street investment bankers now want to start giving gold a larger position in their portfolios. Bank of America Merrill Lynch monthly global fund manager survey recently had polled about 175 wealth managers to know their impressions towards having gold in their portfolio.  The wealth managers who were part of the recent survey manage the portfolios of some of the biggest moneybags and they have more than $543 billion in assets under their watch; hence, these money managers could offer valuable insight into where investors are likely to put their money.

To start with, about 85% of the respondents in the survey think that gold is undervalued at its current price of about $1,232.50 an ounce. The high number of investment managers who think gold is undervalued mimics the popular opinion of wealth managers when they submitted that gold was undervalued in 2009. Interestingly, the majority of investment managers have only agreed that gold is undervalued three times in the last three years.

More interesting however is that gold has soared two times out of the last three times that wealth managersagreed that it was undervalued. For instance, in January 2009, wealth managers agreed that gold was undervalued and the yellow metal went on to  record more than 12% by the end February that year. In January 2015, wealth managers also agreed that the bullion was undervalued and the yellow metal went on to record 7% gains a couple of weeks later..

What does the future hold for gold investors?

The bullish case for gold is obviously benefiting from the rising fears that the bullish rally in the equity markets is just too good to be true. Lionexo analyst, David Shea, observes that “Wall Street has mostly expected stocks to crash under the weight of uncertainty because of Trump’s tendencies to court controversies.” However, U.S. equities have ‘refused’ to crash and they seem to the riding on the wings of Trump’s controversies to new highs, , Investment managers are worried that stocks might eventually suffer a catastrophic crash sooner or later; hence, it is reasonable that investment managers are starting to lean towards seeking refuge in gold.

Secondly, rising populist and protectionism trends sweeping across Europe and America could eventually trigger economic uncertainty that supports the fundamental bullish thesis of gold. For instance, Trump’s economic policies are making the dollar stronger but a strong dollar could actually hurt the economy. More so, Trump’s foreign policy could trigger serious trade wars between the U.S. and it trade partners.

In the final analysis, gold bears may argue the fact that gold doesn’t have much practical or utilitarian value. Of course, gold doesn’t earn an income unlike other assets. Nonetheless, the fact remains that gold is sort of ‘real’ or ‘tangible’ for investors; hence, the yellow metal will continue to have a place in the portfolio of smart investors who want to minimize their risks.

Author: Rudra Singh

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