Gold’s haven status declines

Having waited patiently for the “anyminute- now” moment, gold investors are taking comfort from the recent rise in price in response to geopolitical tensions. Yet the responsiveness of gold, as well as the overall price, appears weaker than would have been expected from historically based models — and for understandable reasons. The metal’s status as a haven has been eroded by the influence of unconventional monetary policy and the growth of cryptocurrencies.

Gold prices rose almost one per cent Tuesday morning as part of the risk aversion triggered by yet another brazen North Korean missile launch over Japan, together with uncertainty as to how the U. S. may respond. But trading below US$ 1, 330, the overall response of gold prices to the last few months of heightened geopolitical risks has been muted, particularly as the 10-year Treasury bond, another traditional haven, saw its yield trade down to below 2.10 per cent the same morning.

Two immediate reasons come to mind.

First, the prolonged pursuit of unconventional measures by central banks has helped de-couple asset prices from underlying fundamentals. In such circumstances, historically based models will tend to overestimate the reaction of asset prices to heightened geopolitical tensions — including the fall in risk assets such as equities, or the rise in gold.

Second, a portion of the traditional buyer interest in gold has been diverted to the growing markets for cryptocurrencies, which are also benefiting from a general increase in demand. As such, the returns to investors there have been greater.

The message for investors in both gold and multi-assetclass portfolios is clear.

While continuing to play a role in diversified market exposures, gold is less of a risk mitigator and asset-class diversifier, for now. Luckily for investors, the need has also been less pronounced, given that market liquidity has boosted returns, repressed volatility, and distorted correlations in their favour. But this is not to say gold’s traditional role will not be reestablished. After all, central banks are in the later stages of reliance on unconventional monetary measures and, given this year’s spectacular price appreciation, cryptocurrencies are more vulnerable to unsettling air pockets.