Interactive Investor

Gold and silver buying hits three-year high

7th June 2016 13:12

by Kyle Caldwell from interactive investor

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Overall trading activity in May - private investors either starting to invest in the precious metals or adding to their existing holdings - represented the highest since spring 2013.

That was when both global stockmarkets and bond markets fell out of form as America's Federal Reserve moved to unwind quantitative easing. The market reaction at that time was described as the 'taper tantrum'.

There are two drivers behind the buying spree. The first is the fact that during the month of May both the gold price and the silver price dipped, falling 7% and 10% respectively.

Investors took advantage of these falls to buy gold and silver at cheaper prices.

Safe havens

The other factor at play is the upcoming EU referendum vote. Uncertainty over the outcome has led investors to adopt a more cautious stance and seek out safe haven assets.

Gold is a view as one of the few assets whose value tends to be uncorrelated with other assets.

Silver is also regarded as a safe haven asset, but less so than gold due to its wider industrial use, which means it has greater cyclical characteristics compared to gold.

Adrian Ash, head of research at BullionVault, says: "Brexit would certainly dent the pound, the stockmarket and most likely house prices much more severely in the short term than a vote to remain would boost them.

"This asymmetric risk makes doing nothing a potentially high-risk option. Amongst safe havens, however, government gilts also look highly vulnerable to a Brexit sell-off, while both the Swiss franc and Japanese yen are run by central banks determined to devalue them and stop foreign investors using them as a bolthole.

"Gold faces no such handicap, and while nothing is certain, it may well rise against all currencies if the broader markets take fright at a Brexit decision."

Gold has returned to favour in 2016. Since the start of the year the gold price has risen from $1,061 an ounce to $1,241 at the time of writing, which represents an increase of 14%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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