Shopping fo jewellery at the Poh Kong outlet.
PETALING JAYA: Gold relationship as an inflation hedge is getting more tenuous as the current high inflation period shows but analysts believe its role as a safe-haven asset remains, especially in portfolio diversification purposes.
Historically, during the era before World War 1 in 1914, the price of gold was typically tied to inflation but price action in the precious metal in the past six months suggested it has lost its traditionally hedging role.
“Gold’s role as an inflation hedge has always been tenuous in the post-2000s world, except for a brief day in the sun as the global financial crisis gathered pace.
“I believe gold remains a decent hedge for extremely high inflation – so if you lived in Turkiye, Argentina, Zimbabwe or Venezuela, you would probably own some gold.
“However, in an elevated inflation environment as we are seeing today, I do not believe its price is dictated by it,” Oanda Asia-Pacific senior market analyst Jeffrey Halley told StarBiz.Gold’s role as a safe haven look more secure as the precious metal spiked from about US$1,804 (RM8,029) a troy ounce in early February to US$2,000 (RM8,901) level on world markets in March after Russia invaded Ukraine.
Shopping fo jewellery at the Poh Kong outlet.
However, the gain was not sustained and has since declined to a low of US$1,718 (RM7,646) on July 21, despite inflation in the United States rising to a four-decade high of 9.1% in June.
“There is no doubt that gold price movements are now dictated by a combination of the direction of the US dollar and US yields.
“If the US dollar and US yields have or are near a peak, then gold should start moving higher over the rest of the year and into 2023.
“But gold’s price action was underwhelming, above US$2,000 (RM8,901) an ounce and it would not surprise me if inflation remains more elevated and for longer than current market pricing,” Halley added.
From a trading perspective, he said, it begs the question of why trade gold when it is just an inverse price movement of the US dollar and US yields; both of which are far more liquid markets.
Market expectations of a less aggressive Federal Reserve (Fed) in September and going forward as inflationary pressures ease saw the precious metal edged higher to close at US$1,774 (RM7,904.94) last Friday but the strong job data could see renewed downside pressure return.
Academic research over the years has found gold to be a poor inflation hedge, with moments when the relationship is visible, said Dr Obiyathulla Ismath Batcha, professor of finance at the INCDF University.
He said the current high interest-rate environment makes the precious metal far more expensive to hold, which could be why gold’s price edged lower as rates rose as the opportunity cost of holding a non-productive asset would not make sense.
“Its value is a carry-over from history but gold will continue to have its safe-haven role in portfolio diversification.
“The move by the United States to weaponise the dollar could see central banks of countries like China continue to hold gold as part of their reserves,” Obiyathulla said.
Latest reports showed that China held 62.64 million fine troy ounces of gold at the end of July, unchanged from end-June. The value of its gold reserves fell to US$109.84bil (RM488.9bil) at the end of July from US$113.82bil (RM506.6bil) at end-June.
Investors are also using assets like property, real estate investment trusts, exchange-traded funds and other commodities to hedge against volatility and inflation.
Halley was unable to say if central bank buying of gold set to be impacted by the tighter monetary environment and more pressing economic issues.
However, he noted that China and Russia have been buying substantial amount of gold for years, but gold price found it hard to break and stay above the US$2,000 level (RM8,901).
“It is likely that most of the gold they have bought has come out of the ground on their own soil rather than from international markets.
“The Covid-19 recession and government restrictions have also severely impacted India’s retail buying of gold, removing another physical support,” Halley noted.
He would not commit to forecast the price outlook for gold but said it lacks the momentum or reasoning to maintain a price level for an extended period of time above US$2,000 (RM8,901) an ounce.
Meanwhile, WealthFort International Sdn Bhd founder Shane Choo said the price of gold is more correlated to the greenback than inflation.
“Traditionally, the gold price has always moved inversely to the US dollar movement, except during a warring period or heightened geopolitical tensions when investors flee to safe haven assets,” Shane said.
He added that the weakness in gold right now is partly due to the strengthening of US dollar on the back of interest rate hike by the Fed.
“If you are bullish about the US dollar in the next one year, then now may not be a good time to invest in gold.
“However, if you feel the US dollar has peaked and you anticipate more geopolitical tensions, going forward, then you may park some of your money in safe-haven assets like gold,” he said.
