(by Simone Alessandro Cassago) A “boring” commodity, but an excellent safe haven asset: what has made the news in recent weeks has not been so much the records of the stock markets, but the trend of gold, a commodity which is seen as boring by market operators although considered an excellent safe haven against inflation, but with a strong appeal to a large number of investors looking for safety; we’re talking about gold.
The precious metal set new records reaching the price of $2.327 per ounce (see the graph above, which shows the trend in the price of gold over the last 5 years, and where the rise in price is evident, which began quietly at the end of last summer) even though stock markets are at record highs, and there has been a significant outflow from ETFs.
Gold, an unusual record? here are the precedents
The precious metal par excellence has continued to break records in recent weeks, reaching historic highs that had recently only been seen on three occasions:
- In 2020with the wave of COVID, was attacked by investors as a “safe haven alternative”, reaching over $2100 an ounce
- Early 2022with Russia’s invasion of Ukraine (at the time it was just over $2,000 per ounce.
- In the spring of 2023, when a “mini banking crisis” occurred with Switzerland “Credit Suisse” on the brink of default and bailed out by UBS; also in this case gold returned to the threshold of $2000 per ounce.
The performance since the beginning of the year is equivalent to a price increase of over 10%; this is a rally that may be surprising, given that gold always tends to gain ground during periods of market distress thanks to its status as a safe haven par excellence; This was also the case during the sovereign debt crisis in Europe, in the summer/autumn of 2011.
Now, however, stock markets are at historic highs, in good shape thanks also to the hopes of a less restrictive monetary policy in the months to come; precisely this last circumstance is one of the key reasons for the yellow metal’s rally.
Gold, the role of falling rates
The reasons for this rally are mainly to be found in terms of interest rates, which are having a positive impact on the trend of gold. This asset benefits precisely from a context of rate reduction, driven by expectations of a cut in the cost of money by the American Federal Reserve.
According to analysts, the market’s expectations are in fact for a cut in US rates, much closer than what was expected at the beginning of the year; gold, in fact, unlike other safe investments, such as government bonds (the well-known government bonds), does not pay a coupon and therefore tends not to have a positive trend in periods when interest rates are high.
The drop in rates, however, is not the only factor that favors such an important run by gold; another supporting factor was certainly the recent weakening of the American dollar, which has historically had an inversely proportional trend compared to gold, i.e. their values tend to move in the opposite direction. This is all because gold is priced in dollars and so, all things being equal, a weaker dollar will push gold higher through demand.
Gold, sales on ETFs
Despite what has been said so far, the rally that the price of gold is experiencing is not without apparent anomalies; in fact, despite being faced with a context of appreciation and rise in prices, financial instruments such as ETFs, which replicate the daily index of physical gold, also saw their sales prevail in February, with negative flows at a global level by 49 tonnes (at 3126 tonnes, the lowest since October 2020).
Sales were concentrated in the US and Europe, while Asia is the only region in the world where the gold ETF market is growing; again according to analysts, although the reasons for this rally are more of a financial nature, the demand for physical metal must not be underestimated, which is constantly growing, dictated by the purchases of the Central Banks which, globally, in the month of February they made purchases of around 40 tonnes.
Gold, transactions not always clear
However, there are also forces supporting gold that are less visible to investors; in fact, according to the international press, it seems that a growing share of physical gold transactions is being moved away from regulated markets, sometimes through channels that are not entirely legal.
All of this is largely attributable, as a consequence, to the sanctions imposed by the EU on Russia, the world’s second largest gold producer, which was cut off from traditional channels after the invasion of Ukraine, without however departing from the execute transactions on global markets, through alternative channels.
Finally, gold can always be an important element in the construction of a solid investment portfolio, given that it has various structural factors on its side, see its nature as a “safe haven” already mentioned, which also allows through small investments to maintain its value over time, especially in times of strong market volatility. Furthermore, it can be considered as a strategic asset, thanks to its de-correlated nature from the financial markets, and to a demand that comes from well-diversified sources such as; gold reserves, investment, luxury industry and technology.
