Maintaining some exposure to gold as a portfolio hedge could be a winning move.

Gold is squarely in the limelight amid escalating geopolitical tensions, shifting monetary policies and growing threats of inflation.

This triple whammy of risks has driven gold’s price to well above US$2,000 per ounce in March 2022. Some analysts have even raised their price target to as high as US$2,500 per ounce this year, as demand for gold soars while Russia’s invasion of Ukraine is likely to drive even more extreme volatility in commodity prices, stock markets and international trade.

The last time gold prices breached the US$2,000 mark was in August 2020, as COVID-19 fears drove investors to hoard gold as a safe haven asset.

This time, the risks of COVID-19 appear to be abating, but inflation is at record highs. Meanwhile, the Russia-Ukraine crisis has added to growth pressures, making gold an even more attractive asset to take refuge in. So should you join the gold rush? Here are some factors to consider before investing in this yellow metal.

1. Gold is a safe haven – and there are scant alternatives

The precious metal has been a top safe haven for centuries.

During the first few months after the outbreak of COVID-19 in 2020, gold prices had soared as investors rushed to this safe haven asset.

However, gold’s safe haven status was somewhat overshadowed subsequently by the rise of potential alternatives such as bitcoin, which some investors claimed could also serve as a store of value.

The outperformance of cryptocurrencies in 2021, alongside recovering equity markets, was partly why gold logged its worst performance in six years to finish the year at about US$1,820 per ounce.

However, with the highly volatile cryptocurrencies failing to deliver on any hopes of functioning as a safe haven during the initial days of the Ukraine-Russian conflict, gold is now back as investors’ go-to shelter from stormy markets and geopolitics.

While the yellow metal has retreated from its recent high, it is still holding above the price level since the start of the year, demonstrating its ability to hold its monetary value well.

 

2. Gold is a way to hedge against inflation

Inflation can erode the purchasing value of a currency.

With Singapore’s year-on-year core inflation rising at its highest pace in nine years in January 2022 and likely to stay above 2 per cent for the rest of the year, some investors are turning to gold as a real asset to hedge against that loss of value.

Even before the Ukrainian-Russian crisis erupted, inflation in the US had reached a 40-year high in February. Oil prices crossed US$130 per barrel on March 3 amid economic sanctions imposed on Russia, which will drive up energy prices as well as transportation costs for everything from food to daily necessities.


3. Gold can be a diversifier for your portfolio

As part of the commodities asset class, this precious metal may have a place in every investor’s portfolio to counterbalance risk.

In today’s market environment, this role has gained even more prominence, as fears about the Russia-Ukraine crisis and the US Federal Reserve’s policy uncertainties weigh on risk assets. 

Notably, countries which relied on massive stimulus during the pandemic now need to rein in their loose monetary and fiscal policies. If they do not calibrate their policies properly, stagflation – implying above-trend inflation and below-trend growth – may rear its ugly head, and gold’s historical record as a recession-proof asset could potentially repeat itself.

 

Gold bulls need to exercise caution too

While the near-term outlook for gold may look shiny, investors should be remain mindful to keep their portfolios diversified and not go all-in on one asset class.

Notably, when interest rates rise, the relative cost of holding gold increases since the metal does not offer dividends or interest. So if geopolitical tensions ease and Treasury yields move higher with the Fed starting its policy rate hikes, gold may lose its lustre again.

“While Maybank has a neutral stance on gold, we recommend investors maintain some exposure to gold as a portfolio hedge”, says Ms Alice Tan, Head of Maybank Private and Head of Products and Investment Solutions at Maybank Singapore.

the bottom line:

Now is an opportune time to invest in gold, but exercising caution through a diversified portfolio is always prudent - and golden.

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