Outlook on gold turns negative

Momentum is turning increasingly negative on gold.

Long-term support was considered by many to be at around $1500 and gold broke through that level on Friday and is now trading below $1450. 

However, we do not own gold in portfolios as a pure momentum play. We own gold because of its defensive characteristics in times of financial stress and because its sensitivity to inflation is better than most other asset classes. We acknowledge that momentum is currently against gold, which is why we are comfortable having only modest exposure. Given this, our rationale for retaining some gold exposure in multi asset portfolios remains intact, but we are unlikely to increase this exposure whilst momentum remains negative. 

While gold is a relatively volatile investment – exhibiting 18 per cent volatility versus 15 per cent for equities – it is an attractive investment in diversified portfolios for two key reasons: it is defensive in times of financial stress, and its sensitivity to inflation is better than most other asset classes.

Remember that risk events can hit markets with staggering speed. The history of financial markets is replete with unforeseen incidents suddenly affecting investor perception of risk and reward. It is likely that markets will once again be taken by surprise over something that cannot be foreseen or predicted. In these events, gold may prove to be an important store of capital value, and indeed perhaps even a healthy source of return. As such, we like gold and continue to hold it in portfolios.

Mouhammed Choukeir is chief investment officer at Kleinwort Benson. 

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