The yellow metal tends to offer effective protection against both economic uncertainty and inflation.
Gold has continued to reach new historic highs in recent months and is up around 35% since the start of the year. The resurgence of geopolitical risk, purchases by central banks keen to diversify their reserves and uncertainty relating to the economic cycle can explain this very good behavior. The rise in real interest rates and the dollar, classic factors in weakening the yellow metal, could have contained the strength of the ounce but this was not the case.
Evolution of the performance of a strategy buying gold and selling sovereign bonds compared to the maximum loss of American equities
Source : Carmignac, Bloomberg, Octobre 2024
The “diversification” factor of central bank reserves seems important to us in a context where inflation has once again become a “living” economic fact and where the temptation for countries in the Southern hemisphere to build an alternative to the dollar is increasingly more lively. Gold is becoming strategic again.
In a turbulent context, gold therefore once again becomes a possible vector of diversification within a portfolio allocation, perhaps better than resilient currencies1American or German bonds2. But how is gold an effective diversification asset?
In periods of risk aversion3 during which stocks significantly underperformed4gold outperformed risky assets of course, but also sovereign bonds. Indeed, short rates have a more immediate impact on the prices of the yellow metal by determining the opportunity cost of holding a non-yield-bearing instrument while long rates can correlate with inflation.
The black line in the graph above corresponds to the performance of an investment where one would buy gold and sell a 10-year US bond. Such an investment generates absolute performance. It performs extremely well in risk-averse markets: +100% during the Internet bubble burst episode or +30% in 2022, an inflationary year offsetting almost all of the underperformance of stocks, when we have the chance. no longer needed. Gold is even less correlated to risky assets than bonds, making it a suitable instrument for portfolio construction; it tends to offer effective protection against both economic uncertainty and inflation. A timely characteristic because the persistence of inflation constitutes one of the major factors of current risk and future transformation5in the current environment where the heights reached by the public debt continue to be pushed back, making its repayment more and more illusory without the active assistance of the printing press.
1 Like the American dollar, the Swiss franc or the Japanese yen.
2 Bonds issued by the highest rated sovereign issuers.
3 2000, 2007/2008 or more recently in 2020 or 2022.
4 The green areas of the graph correspond to the maximum losses on American stocks.
5 With the combination of robust economic growth, high wage inflation, energy transition, less globalization and geopolitical uncertainties, suggests an environment of more frequent potential inflation shocks.
