Gold Needed as Portfolio Diversifier as Central Banks Diverge

January 5, 2015

The long-term prospects for gold remain positive while divergent global central bank policies could be a potential source of economic and political turmoil, Bob Alderman, head of wealth management for Gold Bullion International (GBI) and the former managing director for the World Gold Council, said.

“Often times, here in the States, we don’t fully appreciate what’s happening elsewhere. While [the Federal Reserve] is on the path to raising rates in 2015, other regions are heading in the opposite direction,” Alderman said.

The European Central Bank, the Bank of Japan and the People’s Bank of China are all moving toward more accommodative policies as growth slows and deflationary risks emerge, he noted.

This bifurcation of global monetary strategies will generate increased turbulence in currency and financial markets, which should spur demand for physical gold as an alternative asset, especially in Asia, Alderman said.

Just this morning, the euro fell to 1.1861 against the dollar, a nine-year low, on growing speculation that the ECB will begin quantitative easing (QE) measures and fears that the snap election in Greece on January 25 could set the stage for the country’s eventual exit from the common currency.

Comex gold futures, meanwhile, rose $14.50 or 1.2 percent to $1,200.70 per ounce as investors shifted assets into traditional safe havens.

Interestingly, gold moved higher even as crude oil continued to crumble. Light sweet crude (WTI) oil futures on Nymex nosedived to a five-and-a-half-year low at $50.55 per barrel, down three percent for the session.

Gold and oil tend to trade in the same general direction but the relationship is far from perfect, Alderman said.

“As we look forward a bit, the collapse of oil prices is a deflationary force on the economy, which historically is a negative for gold,” Alderman said. “But it’s our belief that central bankers will try very hard to avoid deflation via monetary policies that will eventually re-inflate asset prices. In the long run, that might benefit both oil and gold.”

Elsewhere, there has been a noticeable pick-up in Asian physical gold buying. China imported a net 99.1 tonnes of gold from Hong Kong in November, according to the Census and Statistics Department of the Hong Kong government, the highest figure since February. This is up from 77.6 tonnes in October and the fourth consecutive monthly increase.

“India and China are far more inclined to look at these prices as a buying opportunity. We’re starting to see more migration of gold from West to East, which is a trend we expect to continue [in 2015],” Alderman said.

But ultimately gold is a highly effective vehicle for diversification and risk management because it consistently exhibits a low-to-negative correlation to most traditional asset classes and provides much needed safe-haven qualities especially during periods of economic and financial stress.

“The average allocation to gold in a portfolio is currently far less than five percent, which shows that as a whole, investors are under-allocated,” Alderman said. “Adding it today is just as important as adding it when it was $1,900; the only difference is that today you can get it at a 35-percent discount.”

GBI is an institutional precious metals provider to individual investors and the wealth management industry. It acquires precious metals from dealers that sell London Bullion Market Association recognised brands and stored on behalf of clients in protected and insured vaults in New York, Salt Lake City, London, Zurich, Singapore and Australia.

Jan 5, 2015 – 5:37 PM GMT

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