ANNOUNCEMENT: On 29th February 2024, Expert Investor becomes PA Europe. Learn more.

Posted inAnalysis

ANALYSIS: Go for gold amid political chaos and reinflation

Patrick Mattar from the iShares EMEA capital markets team said views on gold have appeared to diverge globally this year.

“European investors have consistently added to Gold ETPs, with only two weeks this year in which there have been outflows and close to $1bn of inflows over March,” he explained.

“Flows into gold funds domiciled out of Europe have been much less consistent, with some large outflows at the start of the month.

“This dynamic suggests European investors are currently more focused on portfolio diversification than those elsewhere.”

Falls in the dollar – gold is often priced in dollars so it becomes cheaper to international investors when the greenback falls – and general risk aversion are frequently big gold-price drivers.

But according to James Luke, a commodities fund manager at Schroders, the asset class should be bought primarily as an inflation hedge.

“Given the printing of money by the world’s central banks through quantitative easing, there is every reason to argue that higher inflation is coming in the future,” he said.

“Gold and silver investments in particular remain very under-owned.”

As we enter a near-inevitable era of reinflation, it is therefore tempting to think gold is a no-brainer. But gold has a powerful arch-nemesis – central banks.

Because as central banks tighten their monetary policies by, among other things, raising interest rates the prospects for inflation may fall.

And the US Federal Reserve Bank has already raised its rates from 0.25% to 1% in the space of just four months in an aggressive tightening programme.

The Fed also made hawkish noises around the time of its March rate-setting meeting that implied rates would be hiked again, helping to cause the short-term dip in gold prices.

“We expect prices to fall further over the course of the year as the central bank tightens monetary policy aggressively in response to building inflationary pressures,” said Caroline Bain of Capital Economics.

 

Part of the Mark Allen Group.