In a financial market where volatility continually dominates the headlines, it has become easy to overlook the advantages of investing in traditionally proven commodities like precious metals.
But the limelight is being set upon gold as a popular investment option once more. According to asset management company, ETF Securities, the big gold revival is motivated by its use as a hedge against inflation, including political and economic crises.
Gold’s value was range bound between US$1,750 and US$1,850 an ounce throughout most of 2021, but it climbed to more than US$2,000 in January 2022 and has been trading around US$1,900 since then.
In its latest analysis of current market conditions, ETF Securities said that investors are currently witnessing a decoupling of the relationship between gold’s fair value and US real yields. The research found that while gold is sensitive to rising interest rates - particularly US bond rates, which increase the opportunity cost of holding non-yielding bullion when investors focus on political or economic crises - they will turn to gold as a hedge.
“We are in a period of exceptional geopolitical risk and at the same time, inflation is shifting higher and is no longer seen as transitory. Today, gold’s price is being driven by its safe haven appeal and its value as an inflation hedge,” said ETF Securities head of distribution Kanish Chugh.
Mr Chugh explained that the relationship with real yields has not gone away and will weigh on prices at some point, but so far this year, the gold price has been strong relative to real yields.
As such, he pondered whether the current dynamics are sustainable.
“We have some strong upside in yields this year and real yields will continue to push higher. On the other hand, we might be looking at the end cycle for this growth recovery, with aggressive rate rises. That is when gold comes into its own as a safe haven.”
ETF Securities’ research partner JP Morgan said tension between fair value estimates and hedging against risk is what gives gold its pricing dynamics and right now, geopolitical risk and inflation concerns have become the dominant factors and may continue to be in the short to medium term.
ETF Securities revealed it has bought around 8 million ounces of gold this year to support investment in its GOLD ETF.
