Gold Is The Asset Investors Want to Own
The comments below are an edited and abridged synopsis of an article by Neils Christensen
There is strength in the gold market; it has consolidated around $1,950 in the face of rising bond yields. That theme continues to dominate the precious metals market.
The 10-year yield has broken a trend line going back to the mid-1980s. This could mean the start of the biggest bear market in bonds in 37 years.
Traditionally, rising bond yields are negative for gold because they raise the opportunity costs of the precious metal, a nonyielding asset. Yields are moving higher as the Fed prepares to embark on a tightening cycle.
Minutes from the Fed’s recent meeting show that it sees potential for a 50-basis point rate hike at the next two meetings. Meanwhile, it will start reducing its balance sheet in May.
This hawkish stance would typically have sent gold lower, but not today. Although markets expect interest rates to rise 3% in 2022, they will still be behind the inflation curve. Some economists expect inflation to rise between 4% and 6% this year, so real interest rates will remain negative.
This is where gold comes in. Volatility is destroying capital in equity markets, and investors are losing money with their bond investments as yields rise. As such, they are embracing gold as an inflation hedge and safe-haven asset.
Société Générale is holding a 10% maximum position in commodities in its Multi-Asset-Portfolio; half of that position is in gold; more than 187 tonnes of gold flowed into gold-backed exchange-traded funds last month, the biggest inflows since February 2016; and the US Mint last month sold 155,500 ounces of its American Eagle Gold bullion coins, the best since March 1999. It’s more than just market instability that is driving gold demand. The uncertain geopolitical landscape supports the precious metal, including the Russia/Ukraine conflict. Even when this is resolved, the world will not be able to go back to the way things were, and gold will be an essential stabilizing asset for the foreseeable future.