Gold is back in fashion

Last year was not a happy one for investors in base metals. The GSCI Industrial Metals index slipped by around 15% from its year-high in June, and the gauge lost another 7% from mid-December to January.

It may have bounced since, but don't expect a sustained revival, says Capital Economics. Base metals prices are likely to weaken as the Chinese economy keeps slowing. The gold price rebound, however the yellow metal is now above $1,300 for the first time since last summer does look sustainable.

Central banks are stocking up

The key theme here is a need (especially among emerging- market central banks) to diversify currency reserves away from dollars, to which they tend to be highly exposed. This has been the case for several years, but geopolitcal tension seems to have accelerated the trend. There should be plenty more demand from this source over the longer term. As Swaha Pattanaik points out on Breakingviews, China's economy accounts for almost a fifth of global GDP but its currency makes up less than 2% of central bank reserves. "Reserve managers may not know how long it will take for China's currency, or the euro, to nibble away at the dollar's pre-eminence." But they are beginning to shift away from the US currency.

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Gold's reputation as a safe haven is also coming to the fore now that markets have become more volatile and the political backdrop less predictable. In this context, it's interesting to note that Azerbaijan's sovereign wealth fund, SOFAZ, is set to double its gold holdings to 100 tonnes in 2019 after resuming purchases followinga five-year break, notesZulfugar Agayev on Bloomberg. The fund's executive director Shahmar Movsumov says the fund wants "something that is not someone else's credit risk. In a world where you see the changes in geopolitics and in the dynamics between superpowers and their imminent impact on the financial sector, you want to be on the safe side".

The SOFAZ fund won't be alone: the holdings of gold-backed exchange-traded funds have hit a near-six-year high as investors have warmed to the precious metal, notes Capital Economics. The possible return of inflation (see page 4) is another reason to hold gold. One easy way to bet on the gold price is through the ETFS Physical Gold exchange-traded fund (LSE: PHAU), which tracks the spot price .