- According to a study by Citigroup, spikes in the price of gold because of military action or terrorist strikes have tended to be temporary and that may be playing out in real time.
- The reason for that of course is gold doesn’t generate any yield and has limited applications outside of jewelry and as an alleged hedge against inflation, and even that role appears to only be effective across very long periods.
All that glitters is not gold, at least not historically.
While the price of gold may have been soaring since the onset of the Russian invasion of Ukraine, if history is anything to go by, that rally may prove to be shortlived.
According to a study by Citigroup (-3.26%), spikes in the price of gold because of military action or terrorist strikes have tended to be temporary and that may be playing out in real time.
Despite jumping 3.4% on February 24, when Russia launched a full-scale invasion of Ukraine, prices for gold have since consolidated, even as other commodities such as oil, wheat and aluminum have accelerated.
The reason for that of course is gold doesn’t generate any yield and has limited applications outside of jewelry and as an alleged hedge against inflation, and even that role appears to only be effective across very long periods.
Instead, other commodities essential to life like energy and food will see serious supply-side shocks for as long as the Russian invasion continues.
In the medium term, rising interest rates could also present a real headwind to the non-interest-bearing metal, whereas demand for industrial metals is likely to persist thanks to supply chain disruptions caused by the pandemic and exacerbated by the Ukraine crisis.
Last year, Goldman Sachs (-0.88%) and Citigroup forecast that gold would hit as high as US$2,300 on the back of rising inflation, but have since pared back those projections, to a 30% bull case for gold to hit a fresh record US$2,100 this year.
Gold is particularly risky as a hedge because the end of hostilities in Ukraine could suddenly see a sharp reversal, with bullion possibly falling to as low as US$1,800 or lower.
Investors could perhaps take a lesson from history – during the Battle of Waterloo, the Rothschilds bet that the war with France and Great Britain would map out a similar path to previous conflicts and be a long-drawn-out affair and bet heavily on gold accordingly.
Gold was essential for raising armies in the early 19th century and the Rothschilds took the view that demand would be persistent so gathered as much as they could.
However, when the armies of Napoleon were defeated quickly at Waterloo, demand for gold also vanished just as rapidly.
Fast forward to the present and introducing gold into a portfolio at this stage could subject investors to far more volatility, rather than serve the role as a hedge against geopolitical uncertainty.
Medium term, as interest rates rise, the investment case for gold could decline and undermine the very raison d’être for taking a long position on gold to begin with.
