Gold shows its mettle as a safe haven at last

“With the bond market unhinged and equities pretending that all is well,” precious metals “look like the cleanest shirts in the dirty laundry basket,” says Przemyslaw Radomski on Investing. Gold has proved its worth as a safe haven, gaining 9% since the start of the year and recently finishing its best quarter in nearly two years. By contrast, government bonds – another traditional safe haven – have endured heavy losses.  

While inflation and geopolitical turmoil are good for gold, the metal faces a significant headwind from rising interest rates. As central banks hike rates, investors may be tempted to sell gold – which pays no interest – to acquire assets that do.

That hasn’t been an issue in the last few years: the safest bonds had been paying little, or even negative, interest. Yet bond yields are now rising. That normally means there is less reason to own the financial version of a “pet rock”, causing gold prices to fall, says Louis-Vincent Gave of Gavekal Research. But “gold and other precious metals have followed bond yields higher”. That suggests a belief that interest rates will remain far below inflation. “Deflation is no longer the main threat for portfolios”.

Gold has spent the last few years overshadowed by bitcoin, but is now coming into its own, says John Plender in the Financial Times. “Any claim bitcoin might have to be a geopolitical hedge has been severely dented” by its rocky performance since the start of the war in Ukraine. Gold, by contrast, responded to the invasion by rallying close to its August 2020 all-time high. In fact, bitcoin and gold “have much in common, most notably in having little or no fundamental value and generating no income stream”. The difference is that even if both are in some sense bubbles, at least gold is “a 6,000 year-plus bubble”.