Strategists from global investment firm Invesco suggest that geopolitical tensions during the first months of 2022 and the subsequent war in Ukraine supported the price of gold despite rising bond yields.
In other words, when real yields go down gold goes up. This correlation explains why inflation is gold’s best friend while rate hikes are its worst enemy.
Bloomberg data shows that gold had climbed from $1,829 at the end of 2021 to $1,937 by the end of the first quarter of 2022, a gain of 6 percent. That may seem, according to Invesco’s investment experts modest but the value of most other assets declined during that period (for example, the S&P 500 index declined by 5 percent).
In addition, safe-haven buying pushed gold as high as $2,051 on 8 March, as Russia’s invasion of Ukraine perturbed financial markets. According to Invesco’s investment strategists, this shows once again the diversifying qualities of gold.
Data from the World Gold Council also shows that net inflows of global gold exchange-traded funds (ETF)s reached 187.3 tons, or $11.8 billion in March, bringing the total value of assets under management to $239.7 billion – just below the record of $240.3 billion set in August 2020. This growth, according to Invesco, comes despite a rise in real yields, which represent the opportunity cost of holding gold.
The company also examines how central banks’ rollout policy of tightening measures and rate hike expectations, fueled by higher-than-expected inflation, could be a fundamental driver of gold price for the remainder of the year.
“Historically, we have considered the best environment for gold to be US recession, as that would reduce real bond yields and weaken the US dollar. Our model suggests that such an outcome could push gold above $2,000 and probably higher if the Russia-Ukraine risk premium remains,” said an Invesco analyst.
On the other hand, Invesco notes that given that Bitcoin is often described as “digital gold,” investors seem eager to assume Bitcoin has many of the same characteristics as gold. However, Invesco’s experts do not expect Bitcoin or cryptocurrencies to be a hedge against geopolitical risks going forward.
