The onset of the global Covid-19 pandemic has rattled financial markets and economies around the world. The resulting political and economic uncertainty has prompted investors to flock to safe havens. As a result, gold’s allure as a means to reduce risks and diversify investment portfolios shines as bright as ever.
Gold investments in 2021
Most money managers argue that it's prudent to allocate a certain percentage of one’s capital to buying gold. This is especially true in times of global uncertainty, and 2021 is definitely not one of the most stable years in recent history.
Investor Lyn Alden, founder of Lyn Alden Investment Strategy, argues that at times when money supply is expanding and interest rates are close to zero, buying into gold and gold stocks is a safe bet. This is still the case in 2021 as central banks embarked on record levels of money printing since early 2020 to prop up ailing economies. Historical data shows that there is a very strong positive correlation between the amount of money circulating in the US economy and the price of gold. When the value of the US dollar drops due to heightened money printing, gold prices tend to rise. This suggests that gold is set to benefit even more from the Fed’s loose monetary policy.
Gold prices have been on the rise since 2019 and have climbed by roughly 25% since the beginning of 2020 at the time of writing. Nevertheless, some experts believe that there is still more room for prices to increase. Resources analyst David Lennox of Fat Prophets told CNBC in June 2021 that rising US inflation is set to drive gold prices higher on the back of the surge in US money supply.
However, others argue that gold prices are set to decline as risks in the world may be already subsiding.
Given that no expert is in possession of a crystal ball and current market fundamentals can only tell so much about future price movements, investing in gold carries a certain amount of risk due to price volatility and a range of other factors. Therefore, prudent investors tend to rebalance their positions in light of market changes, meaning that they sell some of their assets when prices are up and buy others when their price is low. Note, however, that the timing of a portfolio rebalancing hinges on other factors besides asset prices; your tax situation and transaction costs should also be taken into consideration.