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SocGen reduces its MAPS gold exposure to 5% as equity strength continues

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(Kitco News) - One of the most consistent gold bulls in the marketplace is lowering its exposure to the precious metal as a hardy U.S. economy offers better investment opportunities.

In its quarterly update, French-based bank Société Générale has downgraded its gold holdings as a portion of its multi-asset portfolio strategy (MAPS). The bank has held a core 6% position in gold through the first half of 2023. However, heading into the fourth quarter, its position has been reduced to 5% of its portfolio.

The analysts said they still like gold as geopolitical uncertainty adds more momentum to the long-term trend of diversification away from the U.S. dollar.

"We continue to like gold in a multi-asset portfolio as a long-term beneficiary of the de-dollarization of reserves from the ‘Global South,’" the analysts said in the report.

However, SocGen added that growing expectations that the Federal Reserve will maintain elevated interest rates longer than expected will create some headwinds for the precious metal.

"With nominal rates close to peak levels, gold should continue to see some selling pressure. While we are structurally bullish on gold, due to structural buying from central banks, geopolitics, and some renewed trend towards de-dollarisation, we are reducing the allocation to gold by 1pp, before reverting to a full weighting when US growth materially slows," the analysts said.

SocGen’s gold position now represents half of its overall commodity exposure. The bank said that they continue to prefer oil over copper in a broader commodity basket.

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"The oil market has become increasingly driven by supply, and notably Saudi Arabia, since production cut announcements this year on top of higher interest rates and persistent underinvestment," the analysts said. "On the demand side, higher rates for longer and slowing growth in China (the world’s largest crude importer) are headwinds. However, given the prospect of a soft landing with no recession in the US, global oil demand may still have room to grow."

Meanwhile, slowing economic activity in China is expected to weigh on copper and other base metals, the bank said.

According to the analysts, global central bank monetary policy, led by the Federal Reserve, continues to dominate market sentiment. The French bank sees the Fed’s tightening cycle quickly approaching the end; however, they said investors should not expect to see rate cuts anytime soon.

"Our central economic scenario assumes that the tightening cycle is done," the analysts said. "This does not mean that rate cuts are imminent, as the final leg of bringing inflation back to the 2% target implies progress on more sticky items. Higher oil prices threaten the headline."

At the same time, as the bank lowers its exposure to gold, it is increasing its positioning in U.S. equities. Heading into the fourth quarter, the bank’s global equity position now represents 51% of the portfolio, with 30% allocated to U.S.-listed companies, up from 21% in the third quarter.

"Our view is that in the current period of positive economic momentum and given the growing risk of further Fed tightening, equities should continue to outperform bonds," the analysts said.

While it still sees the potential for slower economic growth, SocGen said that the U.S. government could implement new fiscal measures in 2024 as they wouldn’t want to see a recession during an election year.

"In the U.S., we shift our S&P 500 index target of 4,750 in 3Q23 to year-end 2023 (from 4,300), as the no-landing scenario is not yet priced in and should be in the coming months as recession calls are deleted/delayed," the analysts said. "In other words, we remain bullish for the near term, despite the likely jitters in 2024."

Looking at the U.S. dollar, SocGen said that cash remains more attractive than bonds. The bank is increasing its cash holdings to 9%, up from 5% in the third quarter. Meanwhile, the bank is lowering its global sovereign debt to 15% from 20% as it reduces its exposure to emerging market bonds.

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