Gold holds the hedge

GOLD is regaining favour among some of the world’s biggest money managers, on the expectation that gold will reach US$5,000 an ounce by year-end.

Major asset managers are now rebuilding positions after the precious metal’s retreat and betting that its longer-term role as a portfolio hedge remains intact.

The renewed buying is likely to keep gold in focus in the weeks ahead, although the path towards higher prices could remain bumpy as investors weigh persistent inflation against a US Federal Reserve (Fed) that is taking a firmer stance on price pressures.

According to a Bloomberg report, the gold rush is on.

Amundi SA, Europe’s largest asset manager, has bought bullion. Fund managers at Pictet Asset Management Ltd, Robeco Institutional Asset Management BV and Fidelity International Ltd have also added to holdings they had reduced earlier this year as prices retreated from a record high.

“Gold is an asset that we consider to be cheap, a good hedge and reasonably liquid,” Lorenzo Portelli, head of cross-asset strategy at the Amundi Investment Institute, told Bloomberg.

However, Amundi is not rushing to increase its position further.

Portelli said greater visibility over the Fed’s interest-rate path would be needed before the firm considers adding to last month’s purchases.

That caution reflects a broader tension facing investors.

Bloomberg reported that more than a dozen asset managers, whose firms collectively oversee about US$27 trillion, were interviewed for the report.

All had either added back to their gold holdings in recent weeks or were maintaining bullish allocations, including BNP Paribas Asset Management and Manulife John Hancock Investments.

Still, the money managers expect any move above gold’s recent ceiling near US$4,600 an ounce to be far from straightforward.

Higher US Treasury yields and growing expectations of at least one Fed rate hike before the end of the year are creating headwinds for bullion. Gold does not pay interest, making it relatively less attractive when borrowing costs and bond yields rise.

That challenge became more apparent following Fed chairman Kevin Warsh’s Aug 28 speech at the central bank’s Jackson Hole symposium.

Warsh warned that US inflation was not meaningfully slowing towards the Fed’s 2% target, prompting investors to increase bets on tighter monetary policy.

Diversified portfolio

For now, however, those pressures have not been enough to undermine the conviction of long-term gold investors.

The metal’s appeal increasingly rests on its role within a diversified portfolio rather than simply its potential for speculative gains.

Arnout van Rijn, a portfolio manager for multi-asset and equity solutions at Robeco, said gold had become more widely accepted among mainstream investors.

“It’s become a much more acceptable asset,” he was quoted as saying by Bloomberg. “It’s become part and parcel of every regular or normal portfolio.”

That shift comes after an extraordinary run-up in gold prices. A rally fuelled in part by speculative capital pushed bullion to an all-time high near US$5,600 an ounce in January before prices retreated for much of the year.

Elevated energy prices and inflationary shocks stemming from the Iran war contributed to the decline, sending gold down to around US$4,000 in June.

The pullback, however, created an opportunity for investors who had been waiting for a cheaper entry point.

“The downdraft to US$4,000. If you didn’t own it already, that was a very good buying time,” Michael Cuggino, president of the Permanent Portfolio Family of Funds, told Bloomberg.

“The long-term macro story is still in place and that’s bullish for gold,” he said, adding that “higher highs and higher lows” could be expected over time.

Central bank demand

For Robeco, renewed buying was partly driven by stronger central-bank demand.

Official-sector purchases accelerated in the second quarter, with net buying reaching 289 tonnes – the highest for any second quarter, according to the World Gold Council.

BNP Paribas’ Sophie Huynh, a portfolio manager and strategist for dynamic asset allocation, pointed to another factor: gold’s changing relationship with risk assets such as equities.

The weakening correlation suggests that bullion’s traditional role as a hedge has returned following a period in which speculative trading played a bigger part in its gains.

“The froth of gold has come off,” Huynh told Bloomberg. The metal is instead being supported by “fundamental drivers such as central-bank purchases and multi-asset managers looking for portfolio hedge.”

Investor positioning is also showing signs of renewed conviction. Gold funds’ net-long position tracked by the Commodity Futures Trading Commission rose in the week ended Aug 25 to its highest level so far this year.

The case for holding gold extends beyond inflation and interest rates.

Concern over the sustainability of US government finances and the dollar’s role as the world’s dominant reserve currency is adding another layer to the investment argument.

Ray Dalio, billionaire founder of Bridgewater Associates, recently said investors should reduce their bond holdings and allocate as much as 15% of their portfolios to gold as protection against the risk of a US debt crisis.

His comments, as reported by Bloomberg, came as long-term US Treasury yields climbed to multi-year highs, prompting Treasury Secretary Scott Bessent to announce additional buybacks of long-dated debt.

The unexpected move helped drive a spike in gold prices and revived interest in the so-called debasement trade.

“You’re seeing money move out of the dollar and into hard assets – gold, Bitcoin being some of that – because there’s a loss of confidence in our fiscal credibility,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial Inc.

Value as hedge

Kevin Khang, head of global economic research at Vanguard Group Inc, said gold’s recent recovery was “very consistent with people being concerned about the US dollar again as a store of value.”

Not all the money managers interviewed by Bloomberg share the same level of concern over the dollar. Some believe anxiety about the reserve currency is overstated.

But there is broad agreement that gradual portfolio diversification could continue to support gold, even without a dramatic move away from the dollar.

Christopher Hamilton, head of client investment solutions for Asia Pacific at Invesco Ltd, said there was “no obvious replacement” for the US dollar.

That, however, does not prevent investors from “increasing diversification at the margin”, a trend he suggested could prove more sustainable than any sudden shift in global currency preferences.

The relatively small allocation to gold in many Western portfolios could also amplify the impact of even modest changes in positioning.

After years of strong gains in US equities, gold represents only a limited share of many investors’ portfolios, leaving room for diversification flows to have an outsized effect on prices.

For investors, the coming months could therefore hinge on how the competing forces play out.

Higher rates and stronger Treasury yields could weigh on bullion, while central-bank purchases, portfolio diversification and concerns over macroeconomic and geopolitical uncertainty could provide an underlying floor.

Regardless of how aggressively the Fed responds to inflation, gold’s role as a hedge may remain relevant because some risks lie beyond the central bank’s control.

“Gold should still hold value as a hedge against what the Fed can’t control,” Tracy Chen, a portfolio manager at Brandywine Global Investment Management LLC, told Bloomberg.