Gold Is An Inflation Hedge, Not Geopolitical Risk Hedge
(Kitco News) - Forget the safe-haven demand says one analyst, gold remains an important inflation hedge.
According to BCA Research’s Marko Papic, global geopolitical instability has reached near historic levels, but gold really needs to wait for inflation to pick up before it shines.
Despite significant rise in geopolitical risk, including ongoing turmoil in Washington D.C., gold has been unable to hold last week’s gains as it rallied to a seven-month high. August gold settled Monday’s session at $1,268.90 an ounce, down 0.19% on the day.
Speaking to Kitco News on the sidelines of the International Economic Forum of the Americas in Montreal Monday, the senior vice president of Geopolitical Strategy at the research firm said that in a low or deflationary environment, it makes more sense to invest in other traditional safe-have assets like U.S. bonds or the Japanese yen rather than gold.
“Our research showed that in a deflationary environment, gold is not a very good hedge against geopolitical risks,” Papic.
However, he added that while gold is not expected to catch a strong safe-haven bid in the near-term, the fact that the global economy is entering a new inflationary environment bodes well for the yellow metal.
“Gold is more of an inflationary hedge. The world needs to see more inflation for gold to do well and we are slowly heading in that direction,” he said. “Long-term, we see more tailwinds for gold.”
Papic noted that some investors are betting on gold as the ultimate safe haven to preserve wealth during another major global financial-market meltdown that would result in major U.S. dollar debasement. But, he added that this scenario is so extreme that gold wouldn’t hold up.
“It is unlikely we are going to see the U.S. dollar lose its reserve currency status in the world. For that to happen, you would need to see a complete paradigm shift and collapse. If that happened, you wouldn’t want to be in gold, you would want to be in guns.”
Papic’s comments came after his presentation on the rise of global geopolitical risks during the Montreal conference. He explained that there is growing multi-polarity in the world as the U.S. loses and reduces its influence on the global stage, which is creating major instability.
He noted that we are seeing the highest number of conflicts than in any other time in recent history.
While a lot of attention is focused on the Middle East, he said that BCA sees the biggest threat in the next 10 to 20 years will be in East Asia.
“The risk of a conflict with China is growing,” he said. “We worry that East Asia will be the next major powder keg.”
Papic also expects that the U.S. dollar to strengthen in the near-term as President Donald Trump pushes stimulus policies and deregulation through Congress. However, the long-term will be U.S. dollar negative as the nation’s deficit grows from the new stimulus spending.
“An increase in the deficit will be inflationary and good for gold.”