Gold is many things to many people. A perennial battleground subject, gold remains arguably one of the most debated asset classes across global financial markets, but as Goldman’s precious metals equity analyst notes, from a fundamental perspective, the risk/reward looks more balanced than that of its bulk and base metal peers, especially in terms of the supply/demand dynamics.

Bulls believe gold is the ultimate store of wealth, and should be compulsory in a welldiversified portfolio given its perceived safe-haven appeal.

In contrast, bears are quick to highlight the lack of industrial use for this non-yielding asset and focus on the fact there is an abundance of above-ground inventory.

Love it or hate it, gold will always be relevant and mentioned in the same sentence as oil when market participants refer to the all-important commodities complex.

Gold is probably the pick of a bad bunch from a future investment standpoint.

Macro trumps micro

Gold is the chameleon of commodities, but ultimately it is primarily used as a financial asset by investors as a store of wealth, a hedge against the threat of inflation, and in some instances, as portfolio insurance. Historically, one of the strongest relationships is the inverse relationship between the gold price and US real interest rates; higher TIPS, lower gold prices, mainly owing to the fact that gold is a non-yielding asset and as such the opportunity cost will increase for investors holding gold as rates increase.

As can be seen from the chart below, the relationship between US 5-year TIPS and gold has been very strong, returning an R-squared of 0.85. In 2016, our economists expect above-trend US economic growth and a corresponding recovery in US inflation expectations.

As we gingerly move through 2016, and the market recalibrates its expectations for the imminent Fed rate hiking cycle, the gold price could be an interesting sideshow and alternative store of value for investors, if the currently anticipated timetable is pushed out.

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