In an environment of high inflation rates, investors are increasingly looking for alternative investments to protect themselves against price increases. Gold was long considered a safe haven, but BlackRock analyst Russ Koesterich now believes this image is outdated.
• High price pressure
• Gold price disappoints as a hedge against inflation
• BlackRock expert advises alternatives
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inflationary pressure
After the restrictions to contain the coronavirus gradually expired, the economy initially recovered quickly from its slump in spring 2020. However, the rapid recovery also boosted the general price level. Energy prices in particular have increased significantly in recent years. This upward trend was further fueled by the war in Ukraine that began in February 2022. But food prices also rose rapidly. The inflation rate has now started to decline on a monthly basis, but prices are still at a high level.
Gold as a hedge against inflation is questionable
Investors are therefore always looking for ways to position themselves against the high price pressure. For example, gold is viewed by investors as a safe haven and therefore also as protection against inflation. However, BlackRock analyst Russ Koesterich sees things differently, as he explained in a note on the asset manager’s website. Compared to the strong fluctuations that consumer prices, but also the prices of stocks and bonds, recorded in 2021, the price of gold only moved slightly.
Correlation of real returns and US dollar with gold
As Koesterich added in a more recent article, gold should not be seen as an inflation hedge in the true sense, but rather has a more differentiated relationship. “In the past, gold has proven to be a good protection against inflation, but only in the very long term,” said the expert. “In the shorter term, gold tends to depend on how interest rates and the US dollar perform relative to inflation.” According to the analyst, this thesis is also supported by historical data on the relationship between gold, the change in real 10-year yields and the US dollar. The weekly rate of change in 10-year real yields and the US dollar had a correlation of minus 0.5 to gold in the period from 2018 to 2023. “Gold has a strong tendency to rise when inflation-adjusted interest rates and/or the US dollar fall,” Koesterich concluded.
Fed interest rate policy in view
In addition, the gold price also depends on the further action of the US Federal Reserve, said the expert. If the monetary authorities actually stop raising the key interest rate and possibly even lower it again, this should benefit the yellow precious metal. If the European Central Bank takes the opposite course due to still high inflation rates and further increases interest rates in contrast to its US counterpart, according to Koesterich, this will likely further weaken the US dollar, which in turn will drive up the price of gold. In addition, the price level of the raw material briefly benefited from the geopolitical tensions with the start of the Ukraine war. “An escalation of the war in Ukraine or a protracted debt ceiling negotiation would be beneficial for gold,” the BlackRock analyst explained.
Potential Headwinds for Gold
Nevertheless, the gold price may also have to expect headwinds, the strategist continued. “Ironically, stubborn inflation and/or wages would likely both hurt gold prices,” Koesterich said. If inflation is even more dramatic in the coming months than the US Federal Reserve and investors expect, the market will have to make adjustments. “In this scenario, real interest rates and the US dollar would likely rise, which would slow gold’s recovery.”
Silver Price May Benefit from Industrial Demand
According to the expert, silver is in a much stronger position instead, especially if investors do not want to do without physical stores of value. “In contrast to gold, silver is used extensively in industry and has recently tended to move in line with short-term inflation expectations,” Koesterich advocated for gold’s little brother in an earlier post. The metal is used in electrical appliances and solar panels, for example, as “SmartAsset” reports. This means that silver can benefit from current trends, which drives up demand and thus the price. According to analysts at the major US bank Morgan Stanley, the price of silver has so far risen more than the price of gold in times of higher inflation due to its industrial use. Although silver alone is not sufficient portfolio protection, Koesterich summarized, the raw material can provide proportional support for hedging against inflation.
Bitcoin suitable as a gold alternative?
In the age of cryptocurrencies, many investors also argue that gold and other raw materials are outdated as protection against inflation and that Bitcoin & Co. are much better suited for this purpose. According to Koesterich, it remains to be seen whether digital assets are really suitable as a hedge against increasing price pressure. “While the increasing adjustment of cryptocurrencies could drive prices further higher, Bitcoin’s value as an inflation hedge is unclear given its extreme volatility and short track record,” said the strategist.
Editorial team finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.
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