Apart from some exotic commodities like coffee, gold has been the best performing asset year to date, up 15% as we go to press. With rising trade uncertainties and a higher (though still low) probability of a recession in the US, this alternative asset has thrived. Yet, at current levels, we argue that investors should consider taking some profits.
Gold is one of the most peculiar asset classes in the financial markets. It has been a store of value and a medium of exchange for centuries and was a key anchor of the global monetary system under the gold standard until the early 1970s. Nowadays, it remains a key asset for global investors and central banks. Nearly 2,500 tons are stored by the Banque de France, 27 meters below the ground floor in central Paris. According to the official statement “all the gold discovered and used in the world since the dawn of time amounts to less than 180,000 tonnes (or approximately 9,000 m3) and could fit easily into the Souterraine”, which won the International Underground Architecture award in 1940…
Gold is also the only financial asset whose price fluctuations are unrelated to fundamentals or expectations of future income flows. We show in the report that there has been absolutely no supply/demand disequilibrium that could explain why gold prices have jumped by 65% since the end of 2022. Central banks, in emerging markets in particular, increased their gold holdings in 2022. But other sources of demand like jewellery declined.
In our view, gold has recently been fuelled by rising aversion to US assets, as Trump has initiated aggressive trade wars. Also, concerns over a potential slowdown of the US economy have dragged the US dollar lower, and gold has an inverse correlation to the US dollar. But still, the strong performance in 2023 and 2024 remains unexplained, and was probably related to heightened geopolitical tensions. Rising distrust of the fiat monetary system might also explain why cryptocurrencies and gold have done so well in recent years.
Going forward, we argue that a potential conflict resolution between Ukraine and Russia would be adverse for gold, as geopolitical risks would decline, hopefully. From a technical standpoint, our chartist also expects there to be extreme resistance at current levels and potential weakness until year-end. Finally, we believe that recent US dollar weakness is overdone, and we are sellers of EURUSD above 1.08. Yet, flexibility is king at present, and we admit that radical trade tariff hikes by the US administration in early April would put renewed downward pressure on the US dollar. But we believe that Trump is willing to reach trade deals and that putting pressure on partners is a strategy to secure better terms.
Which alternatives to gold? The recent rise in bond yields in Europe offers attractive entry points. Markets have repriced yields higher in the wake of the German stimulus package announcement and the European defence push, which will be costly. Yet, the 10-year BTP at 4% or the 10-year French OAT at 3.5% are appealing, in our view. You would not get the 15% YTD delivered by gold, but instead volatility would be much lower.
Week ahead: an important week on the macro front to gauge any evidence of a growth slowdown in the US: March preliminary PMIs, the Conference Board consumer survey, durable goods orders, and the PCE price index. The IFO survey will be the first piece of data released for Germany since the federal elections.
