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Why are people buying gold in readiness for 2017?

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Written by: Joshua Saul
23/12/2016
Having seen its price peaking at 37% earlier in the year - outperforming equities, bonds cash and property - then dipping 13% in the last seven weeks, it’s fair to say gold investment has had a rollercoaster year.

As a result of the volatility witnessed this year, people are now questioning what the future holds for physical gold in 2017.  Should they purchase physical gold now? Should they wait? Or have they missed the boat altogether?

The Pure Gold Company has seen a 14% increase in people investing in physical gold during December compared with November. In this short article we examine why people are purchasing more physical gold now than we’ve seen all year.

Interest rates

The dip in the gold price was impacted by early investors taking profits from the growth in the gold price this year, as well as by the interest rate rise in the US. The, rate rise has strengthened the US dollar and put pressure on the gold price. However a similar situation occurred in December 2015 when the Federal Reserve increased interest rates by 0.25%, but the move failed to spur GDP growth significantly, and investors turned to gold, propelling the price upwards through the first half of 2016.

Inflation

Inflation is set to rise to 4% or even higher next year and this will push up the cost of living. Gold, which also rises alongside the price of goods, is often viewed as an inflation hedge as it retains its value and maintains your purchasing power in an environment where things are becoming more expensive.

Euro and currency instability

Brexit and the Italian referendum point towards the rise of the “anti-establishment”, and elections are soon to be held in France and Germany.  New leaders invariably breed uncertainty and the possibility of political risk. Economic risk is even higher with sterling at a 35 year low and the euro at risk of further decline. As currency becomes weaker, it takes more currency to purchase the same amount of gold.

Bank failure and counterparty risk

Eight of Italy’s banks have been downgraded and the Italian government is borrowing heavily to underwrite its unstable banking sector. Italy isn’t the only European country battling to stabilise its banking sector, with Deutsche Bank downgraded and several UK banks failing stress tests. When we see banks fail it’s those that rely heavily on the banks that are next in the firing line of risk.

The gold alternatives are shaky

* Cash: Saving rates are at record lows, with highs of 1% against predicted inflation levels next year of 4 or 5%.

* Equities : A recent rally in equities on account of the US election has been referred to by some as a blip in the face of misguided confidence in a leader who has no track record. Many of the problems outlined above suggest more downside than upside for equities.

* Property : With the introduction of additional stamp duty of 3% in April this year and the removal of tax relief for buy to let landlords, there are concerns for the UK property market. Deutsche Bank has warned of a potential 20% drop in London property values but even if the outcome is not as dramatic across the country, the Royal Institution of Chartered Surveyors expects price rises to slow to half their 2016 level next year.

Investing in physical gold shouldn’t be a short term decision. Buyers should prioritise the safety and security aspect of owning physical gold above the idea of getting rich quickly. Whereas uncertainly and risk negatively affects the value of equities, property and cash, it increases the value of gold, helping to maintain purchasing power during times of considerable volatility. These are those times.  2016 has seen unprecedented political and economic upheaval, and this is likely to continue into 2017, which is why gold investors are taking advantage of the dip in prices to buy more physical gold and protect themselves from what may come next year.

Joshua Saul is a director at the Pure Gold Company

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