Going for gold: investors are flocking to this safe-haven asset

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It has been a good 12 months for gold and further gains can be expected given ongoing equity market volatility and an expected slowdown in global economic growth.

Gold moved through the psychologically important $US1300 ($1878) per ounce level in January and the next key target is $US1365 as investors buy up the precious metal and gold-backed exchange traded funds.

Gold has rallied in the past six months as fears build of an extended trade war between the US and China.

gold

The formidable $US1365 level, which has acted as a price ceiling for the past five years, could be exceeded this year if geopolitical risks persist.

On the local bourse, gold stocks have rallied too, with the S&P/ASX All Ordinaries Gold Index up 21.9% over the year to May 28, compared to a more modest 12.8% for the S&P/ASX 200.

Northern Star and Newcrest Mining have stood out amongst gold miners, with gains of around 31% and 52%, respectively, over the past 12 months to May 28, 2019.

A key factor behind gold's gains is the trade war. US President Donald Trump reignited tensions with China this month after indicating the US would increase tariffs on $US200 billion of Chinese goods to 25% from 10%.

The US sharemarket dropped on fears of a full-blown US and global recession. Since then investors have been selling riskier assets such as equities and have been moving to defensive assets such as gold and government bonds.

While higher US interest rates and US dollar strength could dent gold's run, these effects are expected to be limited given the US Federal Reserve has signalled a more neutral stance on interest rates.

However, if the US economy does tumble into recession, as the bond market is pricing in, we expect financial risks to escalate around the globe. This could drive the gold price higher, taking gold stocks with it, including those listed in Australia.

Another factor supporting the gold price is increased central bank purchases. According to the World Gold Council, central banks bought 145.5 tonnes in the first quarter of 2019, the largest quarterly increase in global reserves since 2013.

Diversification and a desire for safe, liquid assets were the main drivers of central bank buying. Last year they purchased 651 tonnes, the second highest annual total on record. Central banks have been net purchasers of gold since 2010 as more countries diversify their currency reserves.

Gold-backed exchange-traded products (ETPs) also saw healthy growth in the first quarter of this year as investors sought safe-haven assets.

Quarterly inflows into these ETPs grew by 49% to 40.3 tonnes globally, according to the World Gold Council. Gold-backed exchange-traded funds (ETFs) and similar products account for a significant part of the gold market.

In Australia, flows to gold and gold miner ETFs have climbed.

The VanEck Vectors Gold Miners ETF had funds under management (FUM) of $96.8 million as at May 25, 2019, up from $84.8 million as December 31, 2018, and $72.6 million as at November 30, 2018. Its FUM has steadily risen since the December share market correction.

We believe that in 2019 global investors will continue to favour gold as a safe-haven asset and as a hedge against global market risk.

High equity valuations are unravelling as investors are getting nervous about a sharp equity market correction. ETFs may provide an accessible entry point for investors looking to add exposure to gold and gold miners to their portfolios as a source of defence, liquidity and diversification.

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