Goldman Says Gold Is The Currency of Last Resort; Trumps Treasuries as Haven-of-Choice
The comments below are an edited and abridged synopsis of an article by Tyler Durden
As geopolitical tensions soar, gold has outperformed safe-havens such as US Treasuries, Bitcoin and the Swiss franc.
All three asset classes have traded with a relatively high correlation for a few years, but the last two months have seen that change dramatically.
The geopolitical crisis in Europe has redefined the limits of safety for investors as costlier commodities add to fears of accelerating inflation. Even the yen and the Swiss franc, which tend to strengthen during times of risk aversion, have fared poorly due to their respective central banks’ loose monetary policies.
On one hand, gold’s unique role as currency of last resort will likely take over if restrictions on Russia’s central bank result in leveraging its large domestic gold stockpiles to continue foreign trade, most likely with China.
On the other hand, large sales of gold at below-market prices, given the limited appetite outside of China for such trade settlements, would emphasize its potential limited scale in the future, with few other countries able to use gold as a currency of last resort.
Goldman concludes that the recent escalation with Russia creates stagflationary risks to the broader economy, driven by higher energy prices, which reinforces their conviction in a higher gold price.
Gold is an effective geopolitical hedge as long as events affect the US economy, when gold acts as a hedge of last resort. The ongoing energy crisis and inflation mean that any disruption to commodity flows from Russia and Ukraine could raise concerns of a US inflation overshoot and a subsequent hard landing, which would be bullish for gold.
In addition, with energy prices high and Russia less dependent on external financing than in 2014, Russian sales of central bank gold reserves may be limited.
Russia’s de-dollarization could not be clearer. Goldman expects gold to maintain the cleanest positive correlation to the current geopolitical tensions, and serve as the most efficient hedge of last resort against them.