As an investor, the best strategy is to remain diversified across asset classes. This includes the likes of equities, currency, commodities, bonds, cryptocurrency and precious metals.
In the last few years, cryptocurrencies have been a hot investment class. So, have been equities. I believe that gold has a lot of catching-up to do in the coming years.
This article will discuss four major reasons to be bullish on gold as an asset class. Given the factors, investors can consider exposure to gold or gold mining companies.
Reason One – Expansionary Monetary Policies
The Federal Reserve has indicated that interest rates in the United States are likely to remain near-zero levels through 2023. This is an indication of the point that east money policies are here to stay.
Gold has already surged with interest rates near-zero levels. As expansionary policies continue, I believe that gold will trend higher against all fiat money. This includes the likes of the dollar and euro.
Even in the European Union, GDP growth remains sluggish. The long-lasting impact of the novel coronavirus pandemic is likely to ensure that easy money policies take gold higher.
This is the first reason and the most important reason to be bullish on gold. Paper money will continue to depreciate against precious metals.
Reason Two – Currency Holding Diversification
There is little doubt on the fact that gold is one of the best currencies. If I am wrong, you got to ask the central banks around the world.
In the last few years, central banks have continued to buy gold in order to diversify their currency reserves. In particular, the central bank of China and Russia have been active buyers of gold.
In the coming years, I believe that central banks buying gold will help in supporting gold price on the upside. The reason is that as currencies weaken, central banks will look to protect their reserve wealth.
Further, its likely that trade war will sustain globally. This is another reason for central banks to mop-up gold. Therefore, the overall demand for gold will remain high and ensure that prices are supported on the upside.
Reason Three – Geo-Political Tensions
Another factor that supports gold price on the upside is geo-political tensions. The trade war between U.S. and China is just a small part of the geo-political challenges that the world faces. Its worth noting that gold performs well in times of conflict.
I am not suggesting that major countries will enter a major conflict. However, its worth noting that tensions are yet not over in the Middle-East. At the same time, tensions have been escalating between India and China.
Therefore, geo-political worries are likely to remain high in the coming decade. Investors prefer hard currency like gold in the times of geo-political tensions. For that matter, even silver is attractive.
It’s also worth noting that government deficits surge during times of conflict. This also implies more money printing and is positive for gold.
Reason Four – Demand for Jewelry
One of the major sources of demand for gold is jewelry. It’s important to note that China and India are home to 2.5 billion people.
Both these countries are developing economies with a gradual increase in the middle-class. Importantly, the demand for gold as a jewelry is the highest from India and China.
Another key conclusion is that as standards of living continue to rise in these two countries over the next decade, the demand for gold will also surge.
Therefore, besides the use of gold for technology, demand from central banks and demand for investment, the demand for gold as a jewelry will trigger price upside.
Conclusion
Gold has been an under performer in the last ten years as compared to equities. I would not be surprised if gold can match the performance of equities in the coming decade.
Therefore, investors need to consider exposure to physical gold or quality gold mining stocks in their long-term portfolio.
