(Kitco News) – Geopolitical uncertainty as Russia’s invasion of Ukraine hits the one-week mark has ignited a fire in the gold market, with prices holding well above $1,900 an ounce.
However, one British asset management firm said that regardless of what happens in Eastern Europe, there are other reasons why investors should be looking to add precious metals to their portfolios.
In a commentary published Wednesday, James Luke, fund manager at Schroders, which manages more than $990 billion in assets, said that along with Russia’s war in Ukraine, which has created a massive humanitarian crisis impacting millions of people, shifting monetary policies around the world poses another major threat to the global economy.
“Besides looking for a store of value in times of heightened market stress, we believe many investors see the coming rate hiking cycle as extremely risky given the abnormal macroeconomic backdrop,” Luke said in his commentary.
“Apart from being highly indebted, developed economies have become reliant on massive monetary and fiscal stimulus. The potential for negative feedback loops (a reaction that causes a decrease in function in response to a stimulus) into the real economy and financial markets as stimulus is removed and interest rates rise, is elevated,” he added.
Luke said that there is a risk that central banks, in tightening monetary policies, will create stagflation, an environment of low growth and high inflation. He added that if this happens, central banks will be quick to reverse course, which means real interest rates will stay in negative territory.
Wednesday, in his first day of testimony before Congress, Federal Reserve Chair Jerome Powell said that the central bank remains on track to raise interest rates in March; however, he added that the central bank also needs to be nimble as it evaluates incoming economic data.
Luke described gold as on its way to being the “TINA” (there is no alternative) safe-haven asset in coming years. In particular, bonds, a traditional hedge against market volatility and a counterbalance to portfolio risk, aren’t very attractive in the current environment.
“It is difficult to argue that traditional hedging instruments, such as government bonds, are as appealing as they’ve been in the past, not least because economies are highly indebted, yields are still close to historical lows, and inflation could well be structurally higher,” he said.
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