Gold’s ‘Tried-And-Tested Insurance Characteristics’ Shine Brighter than Ever: UBS CIO

The comments below are an edited and abridged synopsis of an article by Birch Gold Group

Both 10-year Treasury yields and the US dollar index recently climbed from multi-month lows. A rise in Treasury yields has a negative effect on gold because investors who want a safe haven for their funds generally prefer to receive interest. That makes less sense in an environment where the US 10-year Treasury bond pays a negative after-inflation yield.

Gold’s ‘Tried-And-Tested Insurance Characteristics’ Shine Brighter than Ever: UBS CIO - BullionBuzz - Nick's Top Six
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The US dollar index tracks the purchasing power of the dollar against a weighted basket of six other currencies (euro, yen, pound sterling, Canadian dollar, Swedish krona and Swiss franc). When the dollar’s purchasing power declines, it takes more dollars to buy the same amount of gold, and vice versa.

The puzzle is: Why is gold holding up so well when two of the strongest economic forces are pushing it down? Market strategists from two different banks offer some clues:

Bank of America says that investment flows into gold have been steady, despite rising Treasury yields and upticks in the dollar index.

UBS says that gold’s price is supported by elevated demand for portfolio hedges.

With that in mind, the analysis from the UBS Chief Investment Office makes more sense. Strategists said that gold’s tried-and-tested insurance characteristics had held strong, especially compared to other common portfolio diversifiers, including digital assets such as Bitcoin.

What’s needed for gold’s price to climb higher? According to Russ Mould, investment director at British stockbroking platform AJ Bell, it wouldn’t take much. Loss of faith in central bank policies to fight inflation would do it (see Argentina, Turkey, Venezuela for examples). Alternatively, a recession could trigger a surge in gold prices.

If the Fed stays behind the curve in the fight against inflation, or surrenders completely and returns to easy-money policies to support the stock market, Mould thinks gold could easily surpass its all-time highs.

Up for discussion: The economic benefits of a large gold investment, and US states moving out of dollars into precious metals.

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