Gold an ‘unreliable’ hedge against geopolitical risk – SocGen

Otmane El Rhazi from The Bullion Desk.

Gold is not reliable as a hedge against geopolitical risks, Société Générale said on Thursday.

The performance of the yellow metal in periods of regional military conflicts is mixed and it has not performed well consistently, the bank said in a note on Thursday.

One of the most recent examples is the annexation of Crimea by the Russian military during which gold initially rallied towards $1,400.

“[But] the gold rally didn’t last very long and it wasn’t long before gold was trading at levels below when armed men seized Crimea’s parliament,” SocGen said.

While many observers may cite the Libyan war in 2011 as evidence of gold’s credentials as a safe-haven asset, the evidence is not compelling, it added.

While gold hit its all-time peak of $1,921.10 per ounce, nearly 40 percent higher than it is currently, in that rally, it was predominantly driven by “other bullish factors such as the Fed’s quantitative easing and the eurozone crisis”, the bank argued.

“But even if the Libyan civil war were the main driver of gold during this period, it is not difficult to show that gold has not been a reliable hedge against regional military conflicts,” it added.

Despite a small rally on news of the Iraqi invasion of Kuwait in 1990, gold did not hit its peak that year until shortly after the invasion and well before the US counter-attack. Subsequently, the gold price ended lower than where it was before the conflict.

Furthermore, following the Hezbollah attack on Israel in 2006, the gold price “hardly rallied” and again ended lower than it was before the start of the conflict, SocGen said.

Long gold positions do not provide a reliable and consistent hedge against geopolitical uncertainty, it concluded.

“The gold price may rally from time to time on news of military conflicts, but the historical evidence is mixed at best and such rallies are likely to be short-lived,” the bank said.

Instead, Federal Reserve policy, US inflation, real interest rates and the dollar are the dominant drivers of gold most of the time.

“If so, the gold price is likely to trend lower as Fed policy is likely to become less accommodative and US real bond yields are likely to trend higher over time. We consider a gold price close to or above $1,200 to be a very good entry level for shorting gold,” SocGen said.

 

(Editing by Mark Shaw)

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