Shiny Things

Steve, what are your thoughts on gold? Should I include some in my portfolio as a hedge against conflict between the US and Iran?”

The short answer to this question is we include a small allocation to gold in client portfolios for diversification purposes. This allocation is benchmarked at 1-2%; variations from the benchmark are a tactical decision based on several financial market factors.

Going slightly above benchmark weight in gold became of interest around August 2019 when the Fed started to cut interest rates during an expansion – a policy usually reserved for recessionary times. A combination of easy monetary policy, expansionary fiscal policy, and tight labour markets tends to create inflation which benefits gold. An expanding global economy also tends to weaken the USD, so early signs that the global economy is gaining steam would be another reason to like gold and other metals at this juncture. 

If forced to make a choice, my feeling is the Fed seeks to support continued economic expansion. After this lengthy period of persistently low (below target) inflation, I expect the Fed to prioritize the full employment component of its mandate over its second monetary policy goal of stable prices – generally accepted to mean inflation of about 2% – and let inflation run above target for a time. Should inflation increase without increases in the policy rate, it would take the “real” interest rate into negative territory which is positive for gold. (For a more in-depth look at the relationship between real interest rates and gold prices, refer to this analysis by PIMCO at https://global.pimco.com/en-gbl/insights/viewpoints/demystifying-gold-prices). 

The recent events in Iran are a reminder that demand for gold also has a geo-political component, although this is not enough to justify an overweight position (it supports the 1-2% benchmark allocation). Geopolitics is very unpredictable but is clearly supporting gold right now.

So, as a short answer, yes, a ~2% allocation to gold makes sense in client portfolios for diversification purposes. To go higher, I would be expecting inflationary conditions. While I think the balance of probability is that we get continued easy policy and some inflation, the factors that have many expecting a recession this year must not be overlooked. I wouldn’t over do it on gold until I had more confidence in this expansion gaining momentum in conjunction with a continuation of loose monetary policy.

If you have any questions about wealth management, don’t hesitate to contact us. We’re always happy to talk.

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