One of the biggest mistakes that smaller retail investors make is to overvalue the impact that geopolitical flareups will have on the medium- and long-term gold price, Sid Mitra, a portfolio manager at Passport Capital said during the LBMA Precious Metals Conference here.
“Gold is not a hedge against geopolitical risk. In fact, it always concerns me when I read reports that a [geopolitical] risk premium is built into the metal price,” Mitra said.
For example, gold spiked by about $60 to $1,322 per ounce in mid-July on reports that Malaysia Airlines passenger plane en route from Amsterdam to Kuala Lumpur crashed crashed near the Russia/Ukraine boarder. While the market held those gains for a couple weeks, the price has since pulled back dramatically – today gold is at $1,155 – even though there are still plenty of political hotspots around the globe.
“I always worry when physical buyers of gold are not behind the move higher. In that case, weak-handed speculators rushed to buy but they were also the first to exit when headline fatigue set in,” Mitra said.
“So an escalation of political tension in Russia or the Middle East or elsewhere will help the market for a very short time. But if you take a broader view, these type of events are actually a net negative for gold because once the initial euphoria ebbs, the speculative traders go away and that creates a great deal of physiological damage,” he concluded.
Passport Capital is a San Francisco-based hedged fund that manages approximately $3.9 billion in assets. It employs top-down, macroeconomic analysis to identify durable, secular changes not reflected in asset prices.
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