Stock prices fall, gold remains stable

The prices of stocks and cryptocurrencies have fallen sharply this month. The S&P 500 index lost 10 percent, while the Nasdaq technology stock index fell 15 percent. Virtual currencies showed even bigger losses, with price drops of almost 25% for Bitcoin and more than 30% for Ethereum. Investors expect central banks to raise interest rates, which is in principle unfavorable for equities. In addition, geopolitical tensions are rising, causing people to resort to defensive investments. Gold in particular benefits from this, as the Gold price has risen a few percent on balance this year.

Traditionally, gold fulfills the role of a safe haven in uncertain times. In recent weeks, the precious metal has once again lived up to its reputation. While the stock markets turned red and cryptocurrencies lost all price gains since July, gold managed to retain its value. Just like at the beginning of the corona crisis in March 2020, the precious metal is doing better than many other investments. Gold is also outperforming US government bonds, which have fallen a few percent in value due to the rise in interest rates since mid-December. The graph below shows that.

Gold once again proves its status as a safe haven

Investors hold a position in gold

Normally, the prospect of interest rate hikes by central banks is negative not only for equities, but also for precious metals. Gold does not generate any income, which makes it less attractive to keep the precious metal in the portfolio. Still, most investors don't sell their gold, according to the stocks of gold ETFs. They have hardly fallen in recent months. These investment products are popular with investors who want to invest in gold via the stock market because they are easy to trade.

When the Federal Reserve announced plans to end its bond-buying program and reduce its balance sheet around 2013, many investors decided to sell their positions in gold ETFs. In a year's time, about 900 tons of gold flowed out of these investment products. This time, however, investors are staying on their gold. And there is something to be said for that, because inflation is now at 5% in the eurozone and even 7% in the United States. In both cases, this is the highest level in more than forty years.

The market does not expect central banks to change this much in the short term. Central banks can raise interest rates, but certainly not enough to compensate for high inflation. As we wrote earlier, an interest rate hike by the Fed does not necessarily have to be detrimental to gold.

Investors hold positions in gold

Gold as a safe haven

In recent months, yields on long-term government bonds have risen further in both the United States and Europe. The US 10-year yield is at its highest level since the beginning of 2020 at 1.86%, while the German 10-year Treasury yield reached its highest level since May 2019 at -0.05%. Despite this, the real interest rate, the interest rate after correction for inflation, remains negative.

As an investor, you therefore lose money by parking your assets in these government bonds, just like pension funds. Gold is then a more attractive alternative, because it is better able to preserve its purchasing power in the long term. Since 1971, gold has earned an average return of about 8% year-over-year. In addition, it appears that Buy gold A good way to reduce the downside risk of your investment portfolio, as we have shown in this article.

This contribution was made from Geotrendlines