Gold has been seen as a last-resort, portable store of wealth in times of political instability. However, the dollar has also been seen as a safe haven and is more readily transferable – and usually pays interest. It can be argued that gold is a diversifier in a portfolio, but if you cannot come up with an economic argument that is a consistent driver of returns, then I am not sure what role it has in portfolios at the moment.
Gold pays no interest, so the current low interest rates could be seen as making gold more attractive. However the commodity’s rally in the ’70s coincided with rising interest rates and it also started to rally in 2002 as interest rates rose. Prior to this year, rates close to or at zero provided little support.
Our outlook is for inflation to remain low and interest rates to rise only slowly. Higher rates but without much inflation counters the interest rate and inflation arguments, even if you could see that they worked consistently. The global competitive devaluation may look for an outlet in another currency and money may find its way into gold. But if this is the case, then a simple long dollar position may be easier to justify.
