Rising fears of a nuclear skirmish with North Korea and a large U.S. stock market correction have once again sent investors seeking a safe haven for their portfolios, helping to push the price of gold to its highest value in a year.
Amid such looming geopolitical uncertainty, the precious metal closed at its highest value in over a year Thursday — at US$1,350.30 an ounce — but is still well short of its 2011 peak of US$1,900.
This has left some observers questioning whether gold can maintain its long-standing status as the best hedge against volatility, especially in a time of aggressive monetary policy and a rise in popularity and credibility of alternatives such as bitcoin and other cryptocurrencies.
Still, financial experts say gold should be a part of an investor’s basket of financial assets, especially those nervous about global risks.
“I think gold is always attractive as a hedge against any kind of disaster, whether it be political or financial,” says personal finance author Gordon Pape.
“The valuations are extremely high so as a safe haven it never loses its lustre. When times get difficult people go into gold.”
Some market observers have warned that a large market correction is possible because the current rally is the fourth longest without a correction in modern U.S. history.
While the effect on gold prices from such events can be predicted with a fair degree of certainty, cryptocurrencies are somewhat of a black box, with little historical information to go on.
National Bank chief economist Stefane Marion says gold remains a safe haven over such alternatives that have “untested, unregulated measures” that could prompt government intervention.
For example, Canadian regulators recently announced they are examining how initial coin offerings (ICOs) used to finance new ventures fit into securities law designed to protect investors.
Marion believes the price of gold could increase over the next 24 to 36 months, but says it’s being constrained by low real interest rates along with low inflation, uncertainty and volatility.
Bullion is currently overvalued based on the bank’s model, he said, adding that he doesn’t foresee a near-correction for the stock market, despite the unpredictability of U.S. President Donald Trump and the possibility of a war with North Korea.
Robert Cohen, lead portfolio manager for Scotiabank’s Dynamic Precious Metals Fund, suggests investors hold between 5% and 20% of their portfolio in gold, partially depending on their risk tolerance.
Those holdings can come from gold bars, coins, exchange-traded funds, Royal Canadian Mint securities or gold royalty streaming companies.
However, Cohen urges investors against buying gold stocks in an effort to time the market, as the higher returns that bullion companies can generate also come with greater risk.
He suggests leaving stock pricking to the pros, who dig deep into a company’s operations.
“A lot of these companies have skeletons in the closet so to be speak, so you want to be really choosy about which stocks you own.”