Ok, so this is worth noting as we head into September.
Gold is on pace for its best monthly gain since February as investors have sought safety amid escalating tensions on the Korean peninsula and as the political situation in the U.S. continues to deteriorate, raising the specter of a shutdown or a technical U.S. default (and before you go calling the latter hyperbole, just take a look at who’s in the Oval Office).
Of course these haven bids come and go faster than a communications director at the White House, and as Metals Focus analyst Junlu Laing noted overnight, “without any further serious escalation, the yellow metal has already retreated from its 9-month highs.” Right, and PCE and NFP loom large on the horizon.
In any event, it’s been a decent month and we’re still above $1,300:
For his part, OCBC economist Barnabas Gan thinks the geopolitical risk premium isn’t going to completely vanish in the near-term. “Bullion will remain above $1,300/oz for some time, barring a quick resolution to the situation in North Korea following missile firing across Japan,” ol’ Barnabas said, in a note dated today.
He does go on to note that polished doorstops should “trend lower into 4Q” assuming there’s another Fed hike. “Better growth prospect into 2018 should translate into more risk-taking and yield- chasing,” Gan goes on to say, adding that “safe-haven demand, especially for gold, should invariably trend lower with end-2018 target at $1,100/oz.”
Whatever. Who the fuck knows.
What we do know is that Mohamed El-Erian has some thoughts on why shiny paperweights might be losing their appeal as a haven. You can read his reasoning below but do note that Josh is definitely not amused with “shockingly-uninformed” Mohamed:
Via Mohamed El-Erian for Bloomberg
Having waited patiently for the “any-minute-now” moment, gold investors are taking comfort from the recent rise in price in response to geopolitical tensions. Yet the responsiveness of gold, as well as the overall price, appears weaker than would have been expected from historically based models — and for understandable reasons. The precious metal’s status as a haven has been eroded by the influence of unconventional monetary policy and the growth of markets for cryptocurrencies.
Gold prices rose almost 1 percent on Tuesday morning as part of the risk aversion triggered by yet another brazen North Korean missile launch over Japan, together with uncertainty as to how the U.S. may respond. But trading below $1,330, the overall response of gold prices to the last few months of heightened geopolitical risks has been relatively muted, particularly as the 10-year Treasury bond, another traditional haven, saw its yield trade down to below 2.10 percent that same morning.
Two immediate reasons come to mind, one related to several assets and the other more specifically to gold.
First, and as I have discussed in several Bloomberg View articles, the prolonged pursuit of unconventional measures by central banks has helped meaningfully decouple asset prices from underlying fundamentals. In such circumstances, historically based models will tend to overestimate the reaction of asset prices to heightened geopolitical tensions — including the fall in risk assets such as equities, or the rise in gold.
Second, a portion of the traditional buyer interest in gold has been diverted to the growing markets for cryptocurrencies, which are also benefiting from a general increase in demand. As such, the returns to investors there have been significantly greater, sucking in even more funds.
The message for investors in both gold and multi-asset-class portfolios is clear.
While continuing to play a role in diversified market exposures, gold is less of a risk mitigator and asset-class diversifier, for now. Luckily for investors, the need has also been less pronounced, given that ample market liquidity has boosted returns, repressed volatility, and distorted correlations in their favor. But this is not to say that gold’s traditional role will not be re-established down the road. After all, central banks are in the later stages of reliance on unconventional monetary measures and, given this year’s spectacular price appreciation, cryptocurrencies are more vulnerable to unsettling air pockets.
Oh, and when you read that last bit about “unsettling air pockets”, do note that gold looks like it flashed crashed (again) last night:
At the end of the day, we’re sticking with our contention that in a real pinch, it’s better to have a shitload of useless fiat than a bunch of shiny bars lying around because remember: legend has it that Pablo Escobar once burned a pile of money to keep his family warm. You can’t do that with gold…