How investor’s defensive sentiment affects the gold price
By Ole Hansen, Head of Commodity Strategy, Saxo Bank
Gold’s ability to defy gravity amid rising US real yields continues and on Tuesday it reached a two-month high on signs investors are rediscovering gold’s attractiveness as a shield against elevated stock market volatility and risks that the emerging rate hike cycle may drive down growth expectations without having the desired impact on inflation which increasingly looks anything but transitory.
Gold’s small dip last year following an extraordinary rally of 48% during the previous two years was driven by long liquidation from asset managers amid strong equity markets and low volatility as well as the belief rising inflation would turn out to be transitory, and not pose a longer-term threat to growth and price stability.
Drivers for rising prices
Gold traded lower in early January as real yields began to spike higher but since then an underlying bid has slowly been driving prices higher. The are several reasons for the recent change in focus, and apart from current geopolitical concerns supporting a small bid, there are other and bigger drivers emerging, some of which are highlighted below.
- Gold’s credentials as an inflation hedge as well as a defensive asset have received renewed attention with rising stock market volatility amid a market adjusting to a rising interest rate environment. At the same time, we believe inflation will remain elevated with rising input costs and rising wages being two components that will not be lowered by rising interest rates.
- Gold has during the past month been exhibiting rising immunity towards rising real yields with investors instead focusing on hedging their portfolios against the risk of slowing growth and with that falling stock market valuations.
- During the past month, the commodity sector has continued to show strength with the risk off across other asset classes having a limited impact. This highlights the strong fundamentals underpinning many individual commodities where several will be facing a prolonged period of a mismatch between rising demand and inelastic supply.
- While asset managers are showing signs of renewed appetite, the price action has yet to trigger any increased interest from leveraged money managers who often focus more on momentum than fundamentals.
Further reading : Gold shines as investors turn more defensive
