Why Portfolio Theory Suggests Allocating Gold

portfolio theory suggests gold

From Birch Gold Group

This week, Your News to Know rounds up the latest news involving the gold market and the overall economy. Stories include: What portfolio theory says about gold, central banks go big on gold, and silver to reach $18 in 2019.

What portfolio theory says about gold

In a recent analysis, Seeking Alpha contributor Logan Kane showed that the idea of passing gold for riskier assets can be dangerous. During times of peace, many investors are tempted to pursue heavy profits in stocks and the like despite the looming danger of losing everything.

Yet, as Kane demonstrates, one does not need to move past the gold market to amass incredible returns. While the metal promises a safe return in calmer times, each flare-up has the potential to make gold buyers wealthy, especially if it happens on a global scale. Furthermore, Ray Dalio and other gold loyalists have shown that an understanding of commodity dynamics is all that’s needed to make serious money from gold investment.

Gold has a unique advantage over most commodities because its production is difficult to increase in response to heightened demand. With most of the easily-accessible gold having been mined, the metal’s scarcity remains a key attribute.

Additionally, having been popular for thousands of years and essentially a household item in the U.S. pre-1971, some have argued that gold’s role in present day is a niche one. Kane notes that gold can go toe-to-toe with any asset while offering amazing benefits that other classes can only dream of. The portfolio allocation among buyers over the past decade attests to this, with some allocating up to 14% to the metal.

Kane urges investors not to get lulled into a false sense of security during periods of calmness. Even in the absence of any major events, buyers are constantly subjected to currency devaluation and a slow but sure erosion of wealth. Gold has long been touted as the best asset to combat this, along with giving owners peace of mind each time the global news headlines become worrying.

Central banks are buying gold fast, and so should you

The biggest buyers of bullion are looking to break their own records in terms of demand reports Newsmax. A recent report from the World Gold Council shows that central bank gold demand rose by 22% in the third quarter of 2018 compared to the same quarter in 2017.

This puts bullion demand by central banks at its highest since Q4 2015 while revealing some interesting notes about the countries involved. 2018 saw some long-absent countries, such as Poland and India, return and make sizeable bullion purchases to bolster their reserves.

Of course, the top players were occupying the same spots as usual. Russia added 92.2 tons of gold to its stockpile in the third quarter, bringing the total reserves to over 2,000 tons. And aside from the hefty numbers, Russia’s gold purchases are also notable because many see them as a political play.

Turkey chose to battle its currency crisis by investing in gold, reaching second place with 18.5 tons added to its reserves during the quarter. And after a lengthy absence, India’s sudden return and purchase of 13.7 tons gives it third place. The fourth-ranked Kazakhstan, with 13.4 tons added, stands out in terms of reserve expansion, as the country’s stockpile went from 131 tons five years ago to 335.1 tons in present day.

An overview of the top four countries’ currencies shows that gold has enjoyed a sizeable appreciation against local fiat, with Turkey’s lira losing as much as 33% to it. The article also underlines that Russia and China’s gold purchases have worrying implications for the U.S., as the Treasury sell-off gives these nations a large amount of flexibility.

ABN AMRO: Silver will bounce back to $18 an ounce

According to the latest analysis by ABN AMRO, silver is ready to make a U-turn after a year that many investors viewed as lackluster reports Kitco. Georgette Boele, ABN’s senior precious metals and diamond analyst, points out that the metal has dealt with plenty of headwinds in 2018.

These include an exceptionally strong U.S. dollar, higher Treasury yields and a persistent tightening policy by the Federal Reserve. Questions surrounding the Chinese economy have also threatened to affect some of the metal’s industrial demand, which makes up for a large part of overall silver demand.

But the disappointing stretch could end very soon, says Boele, as multiple signs point to a good 2019 and 2020 for the silver market. Starting next year, both the dollar and Treasuries should trend lower, while the strengthening of the Chinese yuan and the Indian rupee should markedly bolster physical demand.

The bank forecasts that the metal will reach $18 in 2019 before moving on to hit $20 in 2020. As investment in the metal solidifies, the bank said that speculators will cover their large short silver positions. This will remove another source of distress and open up the possibility for silver prices to gain even more.

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