Gold has started the New Year off with a bang, as stocks continue to struggle and investors sentiment remains poor, the metal has lived up to its safe haven reputation.
And while gold was on the slide for much of last year, some analysts are suggesting a change in fortunes for the metal in 2016.
The World Gold Council released its 2015 review and 2016 outlook, saying: “In our view, the effect that US rates have had on the gold price is overdone and may take a back seat this year.”
By any metric 2015 wasn’t good for gold.
By the end of the year, gold’s dollar price was down by more than 11% while investor sentiment was bearish.
According to the council, average net-longs reached their lowest level since 2003 and gold-backed ETFs saw outflows of 100 tonnes for the year.
But the council reckons that last year was the exception to the rule, and that the metal’s prospects are a lot higher this year.
While the US dollar is certainly a significant driver for gold, there are two additional important points to consider, the council said.
Firstly, that it is not the only driver, and secondly, that it is not always the most relevant metric for most investors.
Other factors, including how much gold central banks are buying, and the increasing influence of China and India on the metal are becoming equally as important to its price,” the World Gold Council.
“Four years after gold’s nominal high, amid expensive stock valuations and high market risks, gold’s role as a portfolio diversifier and tail risk hedge is particularly relevant,” it added.
Research shows that, over the long run, holding 2%-10% of an investors’ portfolio in gold can improve portfolio performance as it helps protect against portfolio losses in times of market stress
Additionally, gold’s negative correlation to the US dollar and many other major currencies protects investors from fiat currency depreciation.
Not everyone agrees with this assessment, however, with ABN Amro suggesting the metal has actually lost its safe haven appeal.
“Gold has evolved from being a safe-haven asset to a speculative asset” the analyst said.
This is due to the higher level of investment demand for the metal.
Whereas in March 2000 retail investment accounted for 1.4%of quarterly gold demand, in September 2015 it accounted for 27%.
“Even though in general this may be the case, there are periods that investors buy gold because investor sentiment deteriorated as seen this week. However, our research suggests that this is an exception to the rule,” Amro said.