The gold price has abruptly ended its recent run of strength. It’s a reminder that defensiveness is conditional.
- Gold is down 15% over the month
- Research from JP Morgan shows that gold is the most resilient safe haven
- Its price, plus the prospect of higher interest rates, is denting its prospects
A surprising casualty of the Iranian crisis has been the gold price. Gold is down 15% over the month, calling into question its position as a ‘safe haven’ asset. Investors that had loaded up on gold to provide a defence against geopolitical tensions have found that it does not protect in all circumstances, particularly when a crisis comes with a higher dollar and the potential for rate rises.
The narrative around gold was that it provided good protection against geopolitical risks. With a combative White House, geopolitical risks appeared to be here to stay, and therefore gold was a good place to be. Longer-term considerations such as the quantum of US debt and fiscal pressures also seemed to support an allocation to gold.
There were also historic reasons to think that gold would protect portfolios. According to research from JPMorgan, looking at the last 12 major geopolitical risk events that have occurred since the Kuwait invasion and the first Gulf war in 1990, gold is the “most resilient safe haven, up 4% in the month following the event. US 10-year bonds tend to perform better than gold during equity bear markets, rather than around geopolitical events.”
However, this view neglected the other factors influencing the gold price. Gold had been supported by the expectation of lower interest rates and lower inflation. This rapidly reversed with the start of the Iran crisis, with higher oil prices likely to push up inflation across the world. Bond markets quickly shifted to start pricing in rate rises rather than rate cuts. The opportunity cost of holding gold, which has no yield, increased. The dollar has also been rising, reminding investors that part of gold’s strength has been as an alternative to the US currency.
Then there was the price. Gold is up almost 50% over a year, significantly diminishing its role as a safe haven. Jock Henderson, investment analyst at CG Asset Management: “Recent demand has been pre-dominantly narrative-driven, with strong retail investor flows into gold ETFs contributing to heightened volatility. The crisis in the Middle East has exposed this volatility and reinforced the view that gold is trading as a story rather than on fundamentals…Instead of acting as a diversifier, gold has traded as a proxy for risk appetite. Previously, an investor might expect gold to benefit as a haven asset during a time of conflict or as a hedge against inflation, yet it has sold off as investors look to take risk off the table.”
The experience of gold during this recent crisis is a reminder that defensive properties aren’t automatic, and can change with price, and in different market conditions. Gold does not provide natural protection when geopolitics triggers an inflation crisis.
