Hold commodities and half of it should be in gold as economic risks rise - Société Générale
(Kitco News) - The Federal Reserve is embarking on an aggressive monetary policy tightening cycle and one international bank is advising investors to maximize their commodity exposure, including exposure to gold.
In a report published by Société Générale, the bank said it currently holds a maximum allocation of 5% of gold in its Multi-Asset Portfolio, representing half of its commodity exposure. The comment comes as gold prices continue to consolidate between $1,900 and $1,950 an ounce; however, SocGen analysts expect to see a break out to the upside within the next three months.
“High inflation and lower rates suggest that gold will hit record highs. Indeed, we expect gold to reach $2,200/oz in2Q,” the analysts said.
Looking at the other half of its commodity exposure, SocGen analysts said they prefer rotating out of the energy sector and into base metals like copper. The bank also likes silver as an industrial metal.
“To protect portfolios, buying oil is no longer the panacea, as if central banks react too strongly to inflation pressures building up in the economy, they could push the economy into recession leading to a $60/b oil price,” the analysts said.
The adjustments to its Multi-Asset-Portfolio come as the French bank warned investors that economic risks are significantly elevated as the global economy enters this new cycle. They said they are increasing their exposure to cash and U.S. government bonds and reducing their exposure to equities.
“We are now moving into a third, riskier phase, as inflation starts to look permanent and the inflation-towage spiral continues to whirl. The western central banks would like to fill the gaps, but rightly argue that they are too far behind the curve,” the analysts said. “To take into account more hawkish actions, particularly from the Federal Reserve, we keep our large USD exposure (55% of total) and seek to reduce further the risk content of our allocation, by cutting equities by 7 points to 42%, reducing exposure on inflation breakevens (-3 points to 5%), and increasing cash. mainly through FX carry strategies highlighting commodity currencies (+10 points to 10%).”
Although economic risks are rising, the analysts don’t see a recession or stagflation on the horizon.
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“There are several sources of resilience: strong growth momentum, large excess household savings, strong corporate balance sheets, still ultra-accommodative monetary policy, and activist fiscal policy. But a key risk is a confidence shock,” the analysts said.
SocGen said that Russia’s war with Ukraine remains the wildcard for the global economy as it will create further geopolitical uncertainty and drive commodity inflation higher.
The bank also noted that the conflict in Eastern Europe creates long-term shifts in the global outlook that could impact investment portfolios.
“War in Ukraine could be followed by a period of cold war, in which strategic autonomy in defence, energy and food would become key policy features. In our view, the Defence sector will become an area of investment and can be ESGcompliant if one follows some simple rules. Central banks will likely try to protect more of their assets, potentially by adding gold,” the analysts said.
Specifically, although near-term energy prices are heading higher, the analysts said Russia’s war could propel the global green energy transition fast.
“We believe the energy transition must be accelerated, as it also helps achieve strategic autonomy in the energy field, so investment in green deals and other long-term themes like hydrogen should have a new run,” the analysts said.