Can dear gold save investors in current global bloodbath?


A vendor arranges gold bangles in a glass case at a jewellery shop in China. FILE PHOTO | NMG

Russia's attack on Ukraine sparked volatility and fresh uncertainty in global markets. And if there was a corner of the market that had a full share of investors scrambling is the gold market.

Prices of the yellow metal rallied to as high as Sh223,000 after the Russia invasion - a nine per cent rise from the Sh203,400 level it traded at the beginning of February.

The price has doubled over the last decade and could surpass Sh226,000 per ounce for only the second time in its history. Obviously, investors are rushing to park their money in the precious metal for its “safe haven” appeal.

Should the conflict further escalate, the risk premium and safe-haven demand will likely continue to provide support for gold prices. But that said, with the pending rate hike by the US Federal Reserve a possibility this March, is not gold’s upside limited? Let's chop it down.

Given the news, it's easy to see why the yellow metal should continue to soar. And especially, when a major power (such as Russia) is hit with a wave of sanctions that impede its ability to do business, investor fear drives allocations towards gold.

To put it in another way, during times of such uncertainty, any assets that are stored on paper become less interesting. Paper money, in particular, is often the object of investors' scorn as they figure the currency won't even be worth the value of the paper it's printed on.

And for these people, the only true safe haven is tangible assets. Things that have real innate value and aren't just a claim on something of value. Gold falls under this category.

This is the reason why gold prices rose last week. Too bad the illiquid ABSA NewGold ETF (GLD) has not moved a bit.

But here’s the other view. Some analysts believe that if the war escalates further, just owning a gold ETF probably isn't going to cut it. If the heightened geopolitical strife persists, markets will likely get bumpy.

I mean what do you do where there are reports of nuclear war? You buy the dip? Remember this war sits on top of plenty of worries of the past year. One of which is a hawkish US Federal Reserve which presents headwinds for any upside moves.

Moreover, historically, gold is known to experience long periods of underperformance.

A good example is between 2011 and 2015 where it failed to live up to its “perceived safety” as its price went down by as much as 40 per cent. In a nutshell, gold does not come with guarantees.

So to repeat the question above: Will gold’s time-tested return-enhancing and risk-reducing role in investor portfolios in times of crisis repeat itself? With the above-mixed background, the short answer is nobody knows.

Gold prices will go where gold prices want to go. Therefore, investors worried about sudden market movements that could incur sharp losses should stay put. Those who haven’t invested yet should also stay put.

Mwanyasi is managing director at Canaan Capital