‘Buy and hold’ is not the right approach to investing in gold, suggests Giles Coghlan, chief currency analyst, HYCM
We know that investors rally to gold in times of uncertainty. The reason for this is simple – gold is a safe haven asset that is able to maintain, and indeed increase, its value during volatile periods.
To me, 2020 will be known as the year of the gold rush. Its spot price has increased by 32% since the beginning of the year. and finally broken $2,000. This an astounding performance, and naturally has people questioning just how high the price of gold will go. Momentum and confidence is high, and I get the impression that people are keen to see how how the price of gold can go.
The key difference between today’s scenario and other economic downturns has to do with the fact this market crisis is a result of a health pandemic – something investors cannot control. However, the same principles of investing in gold still apply.
Investors and wealth managers have been buying up gold due to their concerns over the global economy’s ability to effectively recover from the COVID-19 pandemic. The fact that private banks are encouraging their clients to buy gold as a means of hedging against inflation and currency fluctuations shows that the market is not confident that we have witnessed the end of the coronavirus outbreak.
Stock markets may be making modest daily gains but the chance of a second outbreak of cases, which seems to be increasingly likely, could result in these gains being lost. What’s more, we shouldn’t forget that there are some big-ticket events on the table for the rest of 2020, including the US Presidential election, Brexit and the ongoing US-China trade war. These will all have significant implications on the financial markets depending on how they play out. As a result, investors are taking a conservative approach by reducing their risk exposure.
In general, gold has proven to be the place for investors to gain during the last three major recessionary periods. In the 1990/91 recession, the 2001 recession, and the 2007/09 GFC, gold has increased in value during these periods of economic downturns.
So, is now the right time to buy gold?
It’s a difficult question with no clear answer. Gold is an important tool for investors; however, it needs to be properly managed. Simply buying and holding gold for long-term returns is the wrong approach to take. Rather, the precious metal is more suited for short- and medium-term purposes and requires the investor to keep a keen eye on the market to know when it is best to sell.
However, what I recommend using is the Volatility Index (VIX). By analysing future risk and investor behaviour, the VIX provides a 30-day projection of the expected volatility likely to be experienced by the major markets.
Based on performances in the past, a drop in the VIX should be followed by a rise in gold prices and vice versa. As such, investors considering gold purchases should watch the performance of the VIX.