When in September 2011 the price of gold hit a temporary high, the investor community very widely assumed the rally would continue. Now, 700 dollars down, they are declaring the end of gold. “Gold will fall below 1,000 dollars” – investment companies and commodities experts have reached a consensus on this. What the value is will soon emerge. Nothing can be excluded as the price of gold can fluctuate very widely in the short term. In 2014, the price plummeted within only a few weeks by more than 20 percent. However, in the long term gold can offer the requisite portfolio diversification, as it often behaves unlike other investments such as equities or bonds.

A decade ago, a fine ounce of gold actually cost less than 1,000 dollars, only for an extraordinary rally to commence, reaching a high of over 1,900 dollars in August 2011. There were three key factors in play: First, fears of a collapse of the banking system after investment bank Lehman Brothers bellied up, triggering a financial crisis. In its wake, Euroland found itself in existential difficulties, spawning the second factor: Round the world, the central banks lowered interest rates. This made bank savings less attractive than gold. And third, energy prices climbed, raising the price of mining and extracting gold.

It was exactly these three factors that have since 2011 run in exactly the opposite direction. Concerns about a collapse of the global financial system have dwindled, also because above all the US banks have returned to smoother waters. In summer 2012 the President of the European Central Bank promised with his historical statement “Whatever it takes…” to do all he could for the euro and then the words were followed by deeds in the form of a trillions-heavy bond buyback program. Admittedly slowly, but as of 2013 US interest rates started to turn around. One year later the oil price collapsed, which in the final instance took the price of gold back by end of 2015 to just short of 1,100 dollars.

End of the bear market

Since then there have been grounds for believing the bear market may end. For some of the fundamentals have since changed. Several large gold mines were no longer able to operate profitably at the price and were forced to close. The latest recovery in the price of oil has upped the pressure of costs. As regards interest rates, there’s a latent risk here to the price of gold. Although the three interest rate increases the Fed has announced for 2017 may prove as illusory as the four in 2016, which then dwindled into only one. But interest rates will rise, that we can assume after Trump’s massive promise of growth and given inflation rates are climbing again.

Risks wherever you look

Which leaves us with the third factor: uncertainty. And here the newcomer to the White House made such a mark in his first two weeks that quite a few are already playing through the scenarios of what the world will look like after four years of Trump with protectionism instead of globalism and trade wars instead of free trade. And the risks are not just economic. For while the global financial system is relatively stable, the geopolitical tension both in the Middle East and in regions like the South China Sea are rising. Moreover, in Europe key political decisions lie ahead, that together with the Brexit could leave the European Union again struggling to master them.

In summary, we can say that the three factors driving the price of gold are at present fairly balanced. And even if it is too early to speak of a new clear upward trend, gold can play a key role in a portfolio owing to its long-term properties, such as value preservation and diversification. The risk of rising interest rates in the USA can be offset precisely for Euro investors by the fact that with rising rates the US dollar should become more attractive a prospect and thus the price of gold will rise in euro terms without the precious metal itself having to gain in value.

Of late, opponents of gold have called it one long story of a misunderstanding in investments. And even some of its fans relinquished their love of the precious metal in recent years as it no longer glittered the way it had for centuries. No love is squandered completely and misunderstandings can be explained. If the object of desire is now 40 percent cheaper than at times when everyone wanted to own it, then this could be the right moment for gold to emerge as the new zeitgeist.

Giles Keating
Giles Keating

The key thing – price has actually come down off the peak. In Euro they came down relativly modestly, in dollar a lot. Since we expect a stronger dollar in the future we recommend the in dollar dominated asset Gold for Euro investors.

Robert Ruthmann
Robert Ruttmann

In 2017 Gold could be a save haven. We have a new U.S. administration which is actually raising the risk of protectionism and of a trade war. And we also have very key elections in Germany and France with the risk that far right parties which want to leave the EU come to power.

Zeitgeist allocation

Published on 13.02.2017

Description Instrument ISIN TER Allocation

Index performance since inception: 

Disclaimer: Historical returns are no guarantee for future performance. A negative development of the instruments contained in the index can lead to a negative development of the overall index. The performance shown here is indexed to a starting value of 100 and corresponds to the gross value development of the Zeitgeist, which will be reduced by the asset management fee of up to 0.85% p.a.
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