Excessive government spending in the US and geopolitical uncertainty are underpinning calls from some investor heavyweights to buy gold as a hedge against sovereign debt risks.
Schroder Investment Management and UBS Global Wealth Management are bracing for a rocky second half and gold has emerged as a preferred trade to navigate the volatility, according to interviews with their chief investment officers who were on roadshows in Asia recently.
“The kind of risks we see, the fiscal risk, the geopolitical risk and the inflation risk sometimes are better covered through gold, which also has the benefit of doing quite well if we’re wrong,” Johanna Kyrklund, group CIO for Schroders said in Hong Kong. “I favor gold over Treasuries,” which don’t offer the same diversification benefits they used to.
Gold has climbed to a record this year amid expectations of Federal Reserve rate cuts as well as buying by central banks and demand for a haven amid geopolitical tensions. But uncertainty on when those rate cuts might come has led to volatility in Treasuries, with a gauge of the US debt slipping back after posting gains last year.
Concerns about the US budget deficit has also fueled bearish sentiment toward bonds. A surge in spending under President Joe Biden, following tax cuts under Donald Trump, has swelled the gap between income and expenditure just as higher interest rates makes carrying debt more expensive.
Gold stands to benefit if there are concerns about US debt and the dollar, according to Mark Haefele, CIO for UBS GWM, who also spoke in Hong Kong. He expects the trend of monetary authority purchases of gold to extend.
“We’ve seen a lot of central banks buying in gold, which we think is going to continue because to some degree the dollar and US financial system was kind of weaponized around Ukraine and central banks realized they may want to have some alternatives,” he said.
A recent World Gold Council report said about 20 central banks expect to raise their holdings of the mental. That’s the highest since the WGC started its gold reserves survey in 2018.
Haefele expects the rally to continue with gold rising to $2,700 an ounce next year. Spot gold was little changed around $2,325 an ounce in Asia trading Monday.
For Kyrklund, fixed income still has a place in portfolios but for the “old-fashioned” reason of yield. She is concerned about the challenging inflation and fiscal environment.
“With all this fiscal spending, the really horrendous risk out there is some kind of sovereign debt problem,” Kyrklund said.
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