Investment Ideas: Gold, Frankincense and Myrrh

As Morningstar.co.uk and investors across the UK celebrate Christmas we look at the investment prospects for the three wise men's gifts

Emma Wall 30 December, 2015 | 8:00AM
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Gold

The price of gold has fallen this year – from 1200 dollars an ounce in January to 1070 today. Commodities were once again out of favour in 2015, and the outlook does not look positive for gold in 2016.

Morningstar analysts predict that the gold price will slip below $1,000 per ounce in 2016. Higher U.S. interest rates will weigh heavily on investor demand, while continuing deflation pulls costs lower. However, prices will recover in the future - in 2018 and 2019, when rising Chinese and Indian jewellery purchases fully close the gap left by investors. Analysts forecast a nominal gold price of $1,300 per ounce by 2020, or roughly $1,160 per ounce in constant 2015 dollars. This month Morningstar analysts revealed how since their introduction, gold ETFs have been one of the most volatile sources of demand and, at times, supply of the precious metal.

Through 2012 as gold prices rose, investors ploughed money into ETFs, leading to peak holdings of nearly 2,700 tonnes, equivalent to about one year's mine supply, explained analysts.

Frankincense & Myrrh

Derived from sap of trees, both frankincense and myrrh were prized for their fragrance. Given in oil form, a modern day wise man may consider investing in oil and gas, prized by economies across the globe. This year the economies across the globe have felt the positive impact of falling energy prices. Crude oil now trades at $39 a barrel – where just 18 months ago it cost more than $100.

Thanks to a boom in the oil supply, countries which were net importers of oil have received a boost to their bottom line – and consumers have been given a tax cut in the form of falling petrol prices. However, countries which rely on a high oil price to keep their economies in the black, such as Russia and Brazil have been hit hard this year.

How long will low oil prices continue? Andy Brunner, head of investment strategy for Morningstar UK recently collated the views of several banks and the consensus was around $45 a barrel for 2016.

Morningstar analyst Stephen Simko says that tremendous uncertainty exists as to how oil prices will trend until industry fundamentals improve, which is likely to be a drawn-out process that doesn't begin until the second half of 2016. Accordingly, investors should be discriminating in their stock-picking and prepared to weather additional volatility.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Wall  is former Senior International Editor for Morningstar