Five reasons to include gold in your portfolio

Equities selloff, strong yen and Fed hikes add sheen to bullion

The precious metal is the best performing commodity of this year. We saw it at the bottom in the commodities market at the end of 2015 and echoed the view again at the start of this year. Gold price was trading at $1,061. Since then, it has moved up to $1,264.
So, the question is where do we go from here? We have a year-end target of $1,400 for the metal, but under the given circumstances, we may need to revisit this by the end of this quarter. There are more than a few reasons why we feel this move will continue towards the upside.
Firstly, the global market selloff has made investors risk averse. They are drifting away from their equity portfolios and jumping back into the safe haven trade. The flimsy picture of quarterly earnings has made investors more jittery and they think it will only become more scanty.
Secondly, the Bank of Japan (BoJ) has no clue on which monetary policy tools will alleviate pain or halt selloff in the Nikkei index. The Japanese yen is becoming stronger against the dollar despite the fact that the BoJ has pegged interest rates in the negative territory. A stronger yen will make a colossal impact on the country's exports.
Thirdly, the People's Bank of China is struggling to convince the markets that their country is not heading towards a hard landing. There are qualms about economic data printed by the government as investors believe the actual situation is more dire.
The default rate for smaller firms is on the upsurge in China. The credit bubble for non-performing debts is a ticking timebomb. The bank can be compared to a headless chicken with respect to its strategy of currency devaluation as its foreign currency reserves are depleting fast.
Fourth, the US Federal Reserve is the chief reason behind the current drama. Its employment data and manufacturing numbers are out of sync. The Fed made the labour market the main reason for raising interest rates. This happened when other central banks were easing monetary policy and the direct result was a mighty dollar. The greenback's strength against other major currencies created a meltdown in emerging markets.
The Fed maintains that more rate hikes are on the way this year. The market does not need to hear this. Traders, instead, want to know whether this is a one-off affair. Although the Fed has taken the decision of a rate hike, their hands are tied now by the volatility and dissenting sentiment in the market. It is, however, working well for gold traders.
If the Fed raises interest rates, it will spur more volatility in the market, which could push the gold price higher. If they respond to the market volatility and lower interest rates, it will make the dollar weaker. This will put the Fed back on the path of lowering interest rates and lead to further increments in the gold price.
Finally, the European Central Bank's negative rates have failed to spur any growth. Negative rates is an untested strategy and it is feared that this policy may trigger a market turmoil.
Therefore, we believe that holding gold in your portfolio could be the most fruitful strategy.
The writer is chief market analyst at AVATrade. Views expressed are his own and do not reflect the newspaper's policies.

• Gold and Forex