60 seconds on the case for gold exposure

Gold is under-owned but some exposure may be needed as inflation is building alongside other risks.

2 November 2017

Mark Lacey

Mark Lacey

Head of Commodities

A minimum amount of gold exposure - whether it is physical gold or gold equities - is warranted given the external risks that are building.

The first risk is negative real rates. Inflation is definitely picking up globally, but at the same time governments have very little room to effectively increase interest rates.

The second risk is equity market valuations and complacency. The market is extremely complacent at this point in time. You can see that in the VIX index – which is a measure of implied volatility – being at a 27-year low. At the same time S&P valuations are extremely stretched, in our opinion. Not everyone thinks that, hence why the VIX is so low.

Thirdly, gold is relatively under-owned. It is only 2% of all global ETFs at this moment in time, whereas it was as high as 10% only five years ago. Global gold equities are also extremely under-owned – they’re only 0.6% of the S&P 500 and the TSX combined. So hardly anyone owns gold and hardly anyone owns gold equities.

This is with a backdrop of increasing political risk. All the signs from government policies and individual politicians suggest that political risk may build over the next few months.

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