Gold loses shine as safe-haven asset | Business

There is talk of gold these days because the European Union has decided, in line with the measures adopted by its G-7 partners, to ban Russian imports of this precious metal. A new sanction on Moscow to try to choke off another of Russia’s great sources of income. Despite the recentness of this decision, the reality is that gold has been on the lips of analysts and investment managers for much longer.

At the beginning of March of this year, gold was paid above 2,050 dollars per ounce. At that time, the gold metal seemed to strongly assert its status as a safe haven in times of uncertainty: war in Ukraine, inflation, interest rate hikes, cuts in the equity and fixed income markets and possible economic slowdown. In recent days, however, the price of gold has broken below the barrier of 1,700 dollars per ounce. A drop of more than 17% that is explained, according to experts, more by the competition that it now seems to have to face from the US dollar (for example, beating the euro for the first time in 20 years) and interest rates ( going up) than for his loss of reputation as a defensive value.

In fact, for Claudio Wewel, strategist at J. Safra Sarasin SAM, gold continues to act as a refuge asset “despite the strong headwinds caused by the exceptionally sharp rise in yields on real rates and the dollar.” Despite this confidence in this precious metal, Wewel maintains that it is not yet “particularly cheap” despite the falls because there are still risks: investors can sell gold to obtain liquidity and thus the dollar will continue to show muscle. Still, his prospects are positive, according to Wewel. And these are, at least for the next 12 months, because, in his opinion, inflation, which will continue to be high, benefits him; because the risk of a world recession is increasing, which could reduce the pressure on the real yields of the rest of the assets; because the US dollar should weaken and finally because geopolitical risks are likely to remain high as the war in Ukraine drags on and Sweden and Finland join NATO.

Schroders’ research team also believes there remain cyclical and strategic reasons to believe gold’s outlook is strong. From a cyclical point of view, gold, in his opinion, has tended to do well in periods of deep slowdown, recession or stagflation. “Currently, with cyclicals falling sharply, gold could benefit as it has performed well against US equities in all downturn phases throughout history.” In fact, in this manager they have compiled historical data on the evolution of the different assets between 1973 and 2021 and, their conclusion is that, not only in stagflation, but also in times of slowdown, the correlation of gold with real returns has increased. “Given that rate hike cycles often lead to recessions, gold is beginning to benefit from the anticipation of rate cuts that central banks will have to carry out in a recessionary environment,” they argue. Therefore, in terms of investment, Schroders believes that, in the current scenario, which is increasingly similar to stagflation, “gold should be relatively attractive.” Most asset classes post losses, so investors are looking for “the least bad,” they add.

risks

For David Finger, specialist in metals at Allianz Global Investors, it is true that gold has been a defensive value over time in times of strong volatility. However, he points out that in a scenario like the current one “in which everything changes rapidly and nothing is behaving as traditionally” there is no guarantee that it will continue to be so despite the increase in geopolitical uncertainty (which attracts refugee flows) and the sharp cuts in the equity market. The markets, in his opinion, concerned about the risks of recession coupled with high inflation, are especially aware of what the central banks will do in terms of interest rates. If these reverse their current upward trend and real yields decline again, gold will benefit because it goes some way to preserving the value of money. The opposite scenario, according to Finger, could happen if the increase in prices, especially in the face of energy supply problems after the summer, becomes even deeper and central banks act to control it. In this context of uncertainty, he advises, at least for the time being, not to carry out a direct investment in this precious metal.

Sébastien Senegas, head of Edmond de Rothschild AM for Spain and Italy, argues that the world has always been attracted to gold, since its discovery. And that, since then, a good part of the time it has behaved as a good shelter value. Although he has not lost, as he explains, his consideration as such “there are factors that have made him lose interest in recent times.” He refers to the rise in real interest rates, the strength of the dollar and the economic weakening of some emerging countries such as Brazil or India, which leads to their central banks reducing their gold reserves. In his opinion, “unless the previous factors are softened or a new catalyst appears” there will be no clear trend for this precious metal. He adds that, given the cuts that have occurred in its price in recent weeks, “it is now a better investment than a few months ago but always as something one-off, with taking small positions and in staggered times.”

Finally, Robert Minter, chief investment officer at Aberdeen Standard Investments, is convinced that “there are fundamental reasons for us to like gold, not least due to rising fears of a stagflation environment with sticky, above-average inflation. average and a slowdown in growth, which means that investors are looking for a safe haven”. Despite price cuts, he maintains that gold is outperforming US or European equities, “not to mention the cryptocurrency market,” he concludes.

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