Decreasing Inflation Shouldn't Stifle Gold Prices, Says Strategist

Inflation might be putting a damper on holiday spending, but not when it comes to stifling the gold rally. The precious metal has certain factors behind it that should buoy prices even if inflation begins to recede.

Central bank buying, along with retail purchasing amid a safe haven scramble, should continue to keep the metal’s prices elevated. The banks, however, have other motives behind their purchases; namely, to maintain reserve asset stability.

“Central banks suggest they intend to add more gold to their reserves, and China’s central bank in particular has room to do so,” wrote Rebecca Patterson, a former chief investment strategist at Bridgewater Associates, in the Financial Times. Patterson also noted that geopolitical factors, such as Russia’s invasion of Ukraine last year, are causing the U.S. central bank to look to other reserve assets like gold for diversification.

In China, the yellow metal’s demand should also help its rally maintain its momentum. The country is continuing to work out its economic growth woes. So this demand will continue as a store of value.

“In addition, the ongoing property deleveraging in China, weighing down on the country’s economy and domestic assets, may keep Chinese households looking to gold as a preferred store of wealth,” Patterson added.

To reinforce the precious metal’s status as a safe haven asset amid market uncertainty, demand should also stay elevated in the 2024 election year for the U.S. The metal can do its part in helping to ease market volatility.

“Finally, investors broadly may want to increase gold allocations as a hedge against an unusually busy political calendar that could exacerbate an already unsettled geopolitical backdrop,” Patterson wrote.

All that said, investors who want to add this exposure to their portfolios may want to consider the Sprott Physical Gold Trust (PHYS). The fund provides an enhanced physical bullion structure. This structure offers the ease of purchase and sale that comes with being traded on a stock market exchange. Shares are redeemable for the precious metal bullion if the investor wants the feel of a more tangible investment.

2 Gold Mining Options

An alternate play on a gold rally is via ancillary services like mining companies, or more specifically, the Sprott Gold Miners ETF (SGDM). The ETF seeks investment results that correspond generally to the performance of the Solactive Gold Miners Custom Factors Index. This index tracks the performance of larger-sized mining companies on Canadian and major U.S. exchanges.

An alternative to SGDM is the more growth-oriented Sprott Junior Gold Miners ETF (SGDJ). The fund tracks the Solactive Junior Gold Miners Custom Factors Index. This index follows the performance of the small-capitalization precious metal companies.

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