The Federal Reserve’s aggressive monetary policy strategy pushed bond yields and the US dollar higher. Therefore, the gold market is likely to continue to suffer. However, a bank still sees gold as an important asset to hold in the current environment of heightened uncertainty.
“In the short term, gold will suffer from Fed rate hikes”
Analysts at Société Générale say in their fourth-quarter multi-asset portfolio report that they remain exposed to gold even as they reduce their overall position in commodities. Analysts point out that central banks continue to push the global economy closer to recession. That’s why they say holding gold as a safe-haven asset will be important.
The upbeat outlook for gold comes as prices approach a two-year low. Yellow metal tests critical long-term support at $1,675. Last week, commodity analysts at the Bank of France warned that rising real bond yields could push gold down to $1,550 by the third quarter of next year. Although gold prices have fallen, SocGen remains in an extreme position on gold. Analysts sweat this assessment in their latest report:
In the short term, gold is likely to continue to suffer from higher real interest rates supported by further Fed rate hikes. From a portfolio-building perspective, however, with expected rising recessionary forces and steady inflation, at the top of the Fed axis, gold appears to be a very safe asset in times of trouble.
“Defense assets such as gold are preferred”
The French bank also notes that it prefers gold over long-term stocks. Based on this, analysts make the following statement:
We think that defensive assets such as gold are preferred. Because we expect them to perform better first. The main reason is that the earnings growth outlook for US equities is likely to worsen in the first half of 2023 due to a strong USD, a weaker oil price and the possibility of continued economic slowdown.
SocGen reduced the overall commodity weight in the portfolio by 5 percentage points to 10%. Gold currently represents a total of 7% of the portfolio’s commodity holdings. Analysts address this situation as follows:
After a strong ytd performance, some commodities are facing a dual challenge of slowing demand and a potentially improved supply situation. It is set to put pressure on prices for many commodities as a result of demand destruction, decline in purchasing power and spending pattern changes driven by cyclical headwinds.
“We feel safer with US Treasuries”
The Fed’s commitment to fight inflation through rate hikes is pushing the economy closer to recession. So the Bank’s overall portfolio strategy is to get a little more defensive by the end of the year. The bank raises the risk of US Treasuries to 25%. At the same time, it is increasing its position in global bonds by 33%. Analysts also make the following assessment for this:
There is no doubt that the Fed wants the US job market to stop overheating. Growth prospects are clearly at risk, given the possibility of imminent restrictive actions by banks. The ECB needs to officially announce its balance sheet losses. That’s why we feel more secure with US Treasuries. Because we believe that the Fed’s credibility will continue to keep inflation expectations below 2%. Indeed, we consider US Treasuries to be one of those rare assets that have already priced in many risks.
The bank also sees the dollar as overvalued. However, he is increasing his holdings of US dollars to 10% of his portfolio strategy. “The main reason for this is China, not the euro,” analysts say. Markets no longer expect the Fed to change monetary policy anytime soon. Despite this, analysts warn that that time will eventually come and investors must act fast.
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