All that glitters

by Michael Yeung

Gold has long been held as a safeguard against financial and economic disaster. Look to the years immediately before and after the 2008 financial collapse to see this in action. In the buildup to the crisis, there was a steady incline in gold prices as more investors flocked toward time-tested and safe investments. Then again in 2007–08, in the midst of the crisis, even more investors turned toward gold in an attempt to limit their losses. In the years immediately following, gold prices skyrocketed, hitting an all-time high of nearly $1,900 and ounce in 2011. 

Gold has been the go-to investment in times of economic uncertainty, and ongoing political tensions, the rise of protectionism and the lingering thought that the current record-setting bull market will come to an end sooner rather than later have made uncertainty is the word of the day. And with gold prices loitering at near two-year lows, now might just be a good time to buy. 

The correlation between gold and the US dollar is historically negative: If the US dollar is strong, gold is weak and vice versa. This has certainly been the case recently, with the greenback continuing a strong upward trend and the gold market on its way down. That said, any one of the issues mentioned above could cause real damage to the American dollar, and it seems more than likely that one, some or all of them could start to negatively affect the dollar soon. 

Furthermore, Fed chairman Jerome Powell has suggested that he expects a slow but steady rise in rates to find harmony between supporting growth and controlling excesses; however, this move will slow the dollar down over time and could get in the way of the longest bull run in history.  

It looks as if all signs are pointing to some devaluation in the US dollar, and if history repeats itself as it so often does, this could likely boost gold prices. Global volatility in the face of trade and political turmoil, as well as the looming threat of a market correction, will likely start to weigh on global currencies soon, which should in turn give gold a boost.  

Furthermore, because gold is a finite resource, while demand for the precious metal may inevitably increase, production levels will start to plateau – many experts expect them to drop in the near future. As new discoveries of gold dwindle, mining companies are forced to dig deeper, invariably raising operating costs, which will likely be reflected in the price of the precious metal. 

Investing in gold is not limited to just buying physical gold bars. Investors can also take advantage of particular gold mining companies that are performing strongly, regardless of overall gold prices. Gold derivative products and contracts for difference [CFDs] are also popular ways for investors to speculate on the yellow metal without ever having to take ownership of physical gold. 

Derivatives and CFDs work by providing investors leveraged access to gold and allowing them to speculate on both the potential gains or losses in its price. Whether investors are bullish or bearish on gold, CFDs and derivative products provide them with more ways to capitalize on the precious metal. 

Famed investor Warren Buffett is known for calling gold a stock that does nothing but “look back at you,” but in a period when stocks and securities are either overpriced or staring volatility risk in the face, an asset that “does nothing” might just be the safest bet. In a time when Bitcoin can go from $1,400 to $20,000 and then back down to $6,000 all in the span of a calendar year, gold’s slow-moving existence as a solid store of value should be an attractive concept to investors. 

Michael Yeung is head of CMC Markets Canada. He has more than 12 years of experience within the self-directed investment industry and 10-plus years of experience working with CFDs specifically.