Prominent Analyst Speaks about Implications of Gold Price Crash
If you had financial assets tied up in gold, you would feel right to feel a little concerned at the recent price crash. To add to your worries further, the crash which was driven by short term factors, will according to Jason Hollands, managing director at Tilney Bestinvest, have at least medium term impact on the price of gold.
Gold no Longer a Safe Haven?
Gold has often been seen as a safe port in a stock market storm. When the markets are in turmoil gold holds its own. It also carries an opportunity cost. Opportunity cost is the cash in the bank interest rate when an asset has no yield. So as gold provides no yield, bank interests rates are 2%, the opportunity cost is 2%.
The other factor in keeping gold price low is the rise in the value of the US dollar. Hollands explains:
“As a physical asset, Gold is often perceived as a store of value during periods when the paper currencies are being devalued and the financial system is fragile. While the European Central Bank and Bank of Japan remain engaged in aggressive monetary easing through their respective money-printing QE programmes, the mighty US Federal Reserve has clearly been signalling the potential prospect of interest rate hikes later this year as if the economic data continues to improve and the UK will likely follow suit, though the guidance around the future glide path of rate rises in both cases is gradual. Nevertheless, an incremental process of US monetary tightening should continue to support the trend of a stronger Dollar.
“There is a well observed, longstanding inverse correlation between Gold prices, with a rising Dollar as the world’s leading reserve currency being bad news for Gold prices.”
So where do I invest now?
As gold prices seem to be rooted in low value, the question of where to invest now will no doubt certainly arise. Many investors are now looking to invest in dollar denominated assets as the currency continues to rise. Inevitably, the rise in the value of the dollar will drive down the price of gold, and US interest rates set to rise will cause gold to have a greater opportunity cost.
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Source: What Investment