The Gold Paradox

By 15/02/2022News

15.02.2022 Goldman Sachs is betting on gold: In the opinion of the investment bank, the precious metal, together with oil, is the best hedge against geopolitical risks. But interestingly, the gold men also see gold as a hedge in times of rising interest rates. Which contradicts the prevailing doctrine.

Price target 2150

Based on the expected slowdown in the U.S. economy and the rise of recession fears, gold ETFs are likely to increase their gold holdings by 300 tons by the end of 2022, Goldman explained. Further, the Wall Street experts predicted a 10 percent increase in nominal GDP in emerging markets. All this points to a gold price of 2,150 dollars per ounce on a twelve-month horizon; the gold men see the six-month target at 2050 dollars. From the current price at a good 1850 dollars, this is not much – but respectable, if the stock markets should really crash.

Source: Bernstein Bank GmbH

The investment bank’s first argument in favor of gold sounds conclusive: The metal serves as a currency of last resort in times of crisis, judged Jeffrey Currie, head of commodities research. For example, he said, the price of gold rose after Sept. 11 and the Gulf War in 2003. However, gold did not respond to the annexation of Crimea in 2014. In general, he said, crises involving the U.S. had a greater effect on the price of gold. We think: Even if the Ukraine panic should probably ease for the time being after the Russian partial withdrawal, the danger is not over yet.

Threat of recession

There remains the issue of interest rate fears. “A common concern for gold in 2022 is looming Fed hikes and the potential for higher long term real rates,” Currie acknowledged. However, he said, it is historically the case that gold rises in price during periods of rate hikes. Gold is also currently showing resistance to rising yields on 10-year U.S. Treasury bonds. Goldman explained this paradox with fears of a recession. “This means if inflation fails to slow down in the second half of 2022 and the Fed is forced to hike more than currently expected, gold should be resilient as this would increase fears of a potential recession.” Normally, high interest rates are poison for gold, as interest-bearing investments are then more attractive – because the metal does not yield a return and, in addition, renting a safe deposit box or having one’s own safe first costs money.

And this closes the circle between inflation and geopolitical risks: The ongoing energy crisis and inflation already above the Federal Reserve’s target, he said, lead to concerns that a disruption in commodity flows from Russia will lead to overshooting inflation and a hard landing. Which would directly affect the U.S.

Risk aversion

And how does the new competitor, bitcoin, affect gold? According to Currie, “Gold is a risk-off inflation hedge, bitcoin a risk-on inflation hedge. (…) It is important to remember that risk-aversion is a major driver of investment interest in gold vs assets such as equities and, to an even greater extent vs bitcoin.” So if you want to hedge your portfolio against weakening growth and falling asset valuations, you should take a long position in gold, according to Goldman. Bernstein Bank wishes successful trades and investments!

 


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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.