Gold and silver
24 Jun 2016 | By Ned Naylor-Leyland

Brexit proves gold’s value as insurance

The result of the eu referendum has brought into sharp focus gold’s continuing value as insurance against the risks of the contemporary economic architecture.

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GOLD RALLIES ON BREXIT

Since the result of the EU referendum became clear this morning, gold in sterling terms has rallied around 15% to its current price of £974 per ounce. Despite this huge leap, gold in sterling terms still sits approximately 20% below its highs of 2011.

Gold has always provided decorrelating diversification within portfolios, but it also possesses systemic insurance characteristics that are needed in certain extreme circumstances. This is one of the main reasons why G20 central banks hold 18% of their reserves in the form of allocated ‘monetary’ gold.

FIRMER THAN A FIAT CURRENCY

In 2014, Alan Greenspan, former chairman of the US Federal Reserve, was quoted as saying: ‘Gold is a currency. No fiat currency, including the dollar, can match it.’ Today investors are being reminded why that is.We live in a world where quantitative easing (QE) is deemed acceptable, where rates are held at historic lows and where risk is widely apparent: in this world, the need for insurance against an unhappy endgame for the current financial architecture is increasingly clear.

A SENSIBLE HEDGE

Despite this, investors still have record-low allocations to precious metals. While monetary and systemic insurance is still going cheap and the ramifications of the recent historic events of the EU referendum are still being digested, we reiterate that hedging portfolios with this asset class is both sensible and opportune.Ned Naylor-Leyland is manager of the Old Mutual Gold & Silver Fund

 

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