Has gold lost its shine as a safe haven against inflation?

Rising bond yields and a strong US dollar are taking the sheen of the precious metal in investment portfolios

Gold bars are presented at the German Central Bank in Frankfurt am Main, central Germany on August 23, 2017.
The Bundesbank, the German central bank, announced that it has completed the repatriation of all its gold reserves still stocked in Paris and part of those in the United States. / AFP PHOTO / dpa / Arne Dedert / Germany OUT
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Arguably the biggest shock of this turbulent year for investors is that the gold price is not going through the roof.

After surging to $2,052 an ounce on March 8, it has slumped to about $1,850 at the time of writing ― a drop of 9.8 per cent.

Gold is in correction territory, which is odd, given that for thousands of years it has been seen as a safe haven in times of trouble, and these are undoubtedly troubled times.

Most investment experts say every portfolio needs a sprinkling of gold dust to hedge against riskier assets such as shares. When stock markets lose their lustre, gold usually glitters. But not this year.

Gold is often seen as an inflation hedge, too, but rocketing consumer price growth hasn’t lifted it.

Does gold no longer work?

Gold is often seen as an inflation hedge, too, and investors certainly need one of those right now, with shares falling everywhere and New York’s Nasdaq tech index down more than a quarter.

Does gold no longer work?

At times like these, gold should be doing what everybody expects — to shine and do so brightly, says Fawad Razaqzada, market analyst at City Index and Forex.com. “Until now, the metal has been unable to find much demand either from inflation hedging or the flight from riskier stock markets.”

Two factors have held it back. First, gold pays no interest, so holding it looks less attractive as bond yields rise.

So far this year, yields on 10-year US government bonds have climbed from 1.5 per cent to about 2.75 per cent, so the opportunity cost of holding gold (in terms of lost interest) has climbed.

“This makes gold less appealing for income seekers,” Mr Razaqzada says.

The second factor is the US dollar. As the world’s reserve currency, it has proved a more reliable store of value than gold.

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So far this year, the greenback is up 10.27 per cent against the Japanese yen (another supposed safe haven), 5.82 per cent against the euro and 5.17 per cent against the Swiss franc (also a safe haven).

Gold is priced in US dollars and this makes it more expensive for international investors buying it using other currencies, which is squeezing demand.

Yet, Mr Razaqzada lists five reasons why the yellow metal has a brighter outlook.

First, bond yields have dropped sharply as investors pile back into the perceived safety of US Treasuries, reducing the opportunity cost of holding gold.

Second, shares and cryptocurrencies have slumped as economic uncertainty rises, increasing gold’s safe-haven attraction. Third, the US dollar became too strong and may have peaked, falling 2 per cent against the yen and euro in the past month alone. This makes gold cheaper for non-dollar buyers.

Fourth, the gold price is relatively inexpensive after recent weakness. Finally, inflation is rocketing and gold offers a way of hedging against that.

“If gold was ever going to rise, you would feel now would be the time,” Mr Razaqzada says.

However, he adds a note of caution. “Given gold’s recent behaviour, it is perhaps better to wait for the metal to show a strong recovery signal before piling in.”

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Risks remain as gold continues to fall whenever the US dollar or US shares recover their mojo, Vijay Valecha, chief investment officer at Century Financial, says.

“Yet the precious metal’s downside appears limited as it is supported by disappointing US economic data,” he adds.

As markets price in an increased probability of a global recession, the US Federal Reserve may slow the rate of interest hikes, hitting bond yields, Mr Valecha says.

“This should support the yellow metal as the two are negatively correlated. If bond yields rise, the gold price falls, and vice versa.”

As with other asset classes right now, gold bugs are waiting to see how the Fed will move. Yet other analysts see a clearer upwards path from here.

Gold’s role as a portfolio diversifier is more important than ever as war in Ukraine drags on and economic and political volatility grow, says Paul Jackson, Invesco’s global head of asset allocation research.

“Historically, we have considered the best environment for gold to be a US recession, as that would reduce real bond yields and weaken the dollar. Our model suggests that such an outcome could push gold above $2,000 and probably higher if the Russia-Ukraine risk premium remains,” he says.

By contrast, suggestions that Bitcoin and cryptocurrencies are now “digital gold”, a store of value in times of trouble, are wide of the mark, Mr Jackson argues.

Bitcoin is simply too volatile, almost halving from $67,734 to $35,364 in the two months to January 23, 2022. Cryptocurrencies behave like stock markets, only with greater volatility.

The cryptocurrency crash has all the hallmarks of a classic bank run, Jason Cozens, founder of gold platform Glint, says.

“People lose confidence in their ability to recover funds, selling happens and everyone runs for the exit,” he adds.

The digital gold theory does not stand up to scrutiny, Mr Cozens says.

“In times of inflation and global uncertainty, gold still provides the safest haven for savings.”

Its long-term performance justifies investor faith. “The last 50 years have seen fiat currencies lose 80 per cent to 85 per cent of their value. In the same period, the value of gold has increased five-fold.”

Gold’s role as portfolio diversifier is now more important than ever as war in Ukraine drags on and economic and political volatility grow
Paul Jackson, Invesco’s global head of asset allocation research

Gold is due for a comeback, says Chris Beauchamp, chief market analyst at online trading platform IG.

“Gold bugs will have been waiting for their moment and will be pleased to see the metal has finally woken up," he says.

“Some overdue USD weakness is going to help and, as everyone worries about a US recession and high inflation, gold might finally have a chance at recouping some of the losses seen since April 1.”

As a rule of thumb, gold should make up 5 per cent to 10 per cent of the typical portfolio, at most. So check what exposure you have before buying and don’t expect to bank a quick profit. Future movements of any asset class are impossible to predict with any consistency.

However, if your portfolio is low on gold, now could be a good time to buy with a long-term view.

The easiest and cheapest way to get exposure is through an ETF such as the SPDR Gold Shares ETF or iShares Gold Trust ETF.

Gold will not always shine, but it is worth buying and holding because it tends to do well just when you need it most.

Updated: March 13, 2024, 12:22 PM