Has gold lost its mojo as a safe haven asset?

G Chandrashekhar | Updated on: Jul 20, 2022

For the first time since August 2018, speculative positioning in gold, silver, platinum and palladium are net short again on the bourses

Gold ought to be the preferred safe haven asset in these uncertain times marked by geopolitical instabilities, high inflation and recession fears. But in reality, it is not so. The yellow metal has lost its lustre, facing as it does, severe headwinds holding back any possible upside, at least for the time being.

Rising interest rates and an exceptionally strong US dollar (now on par with the Euro, a 20-year high), have combined with tepid physical and investment demand, pulled the yellow metal below $1,700 a troy ounce during last week, the first time in almost a year. For five weeks running, gold faced weekly losses in the international market.  

More and more investors exiting investment positions in gold had put additional pressure on the price. Even as the financial investors continue to exit this market, they have built net short positions for the first time in recent years.

What’s more is the outflow from the ETFs exacerbating  the price action. Nearly 100 tonnes are estimated to have been withdrawn in recent weeks by the institutional investors.

This means the market is dominated by bets on falling prices, reflecting the pessimistic mood among financial investors.   

Simply put, gold has not lived up to its reputation as a safe haven asset during uncertain times and as a hedge against inflation. The world is gripped by a high rate of inflation. The US and Europe face multi-decade high rate.

Other precious metals too fall

As it happens, gold has also pulled down other precious metals. Despite varied industrial use, silver usually tags onto the coattails of the yellow metal. At $18.7, silver today was down by a whopping 13 per cent from the levels a month ago. Platinum, too, has suffered value loss.

Most interestingly, for the first time since August 2018, speculative positioning in all four precious metals – gold, silver, platinum and palladium – is net short again in the bourses.     

Outlook

When will the negative sentiment change, or will it? It is unclear about the reversal in gold market sentiment. Some experts argue that persistent inflation and recession fears will drive investors again towards gold. But, there is a strong view that in the current circumstances, not gold but the US dollar would be treated as a safe haven asset. The weak demand side, often ignored by bulls, would also have to be considered.       

Closer home, physical demand is far from robust. High inflation is already eroding the purchasing power of people. Worse, a weakening rupee (80 to a Dollar already) and a recent hike in customs duty (to 12.5 per cent) have made gold less affordable.

It is known that gold’s physical demand registers a seasonal fall between June and September due to agricultural operations in rural areas. Demand revival will have to wait till October when the harvest of Kharif crops takes place, and rural folks have some money. Also, the government is keen to see a reduction in gold imports as the metal is regarded as a de-merit commodity in policy- making circles.

(The author is a policy commentator and commodities market specialist. Views are personal). 

Published on July 20, 2022
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