Investors have been pouring money into safe haven assets this year, including gold and Treasury bonds, due to rising geopolitical uncertainties. Gold touched its highest level in nine months after North Korea launched a missile over Japan and is up about 13% this year. Friday's weaker-than-expected jobs report also supported gold.
The US dollar, which is usually favored by investors during uncertain times, is at its lowest level in about 2 ½ years against other major currencies, on rising concerns about the pace of US economic growth and political discord.
On the other hand, the Euro has soared this year as political risks in the Euro zone have subsided and economic growth continues to pick up. Gold has benefited from dollar weakness as it usually moves inversely to the dollar.
Recent FOMC minutes revealed that some committee members were concerned about inflation persistently undershooting the central bank's target. Fed fund futures currently suggest approximately 37% probability of another rate hike this year. A dovish Fed is good for gold because higher interest rates increase the opportunity cost of owning cost.
As geopolitical uncertainty continues to rise, some exposure to gold makes sense. Further, Hurricane Harvey is expected on have knock-on effects on the third-quarter economic growth. Looming debt ceiling could also weigh on investor sentiment, sending them to safer assets.
Gold has low correlations with other asset classes and acts as a portfolio diversifier. Therefore, there's a strong case for holding some gold, about 5% to 7%, in your portfolio.