(Kitco New) - Although the gold market has been unable to hold consistent gains above $2,050 an ounce, it has managed to hold elevated support above $2,000 an ounce. An important pillar in gold’s relative strength has been ongoing geopolitical uncertainty.
Analysts at HSBC expect that geopolitical uncertainty will continue to provide long-term support for the precious metal as they highlight a new element impacting the global economy and financial markets.
Gold has seen significant safe-haven appeal in the last two years as investors have looked to protect themselves from growing uncertainty created by two major wars. Russia’s war with Ukraine has now moved into its third year, and Israel’s war in Gaza continues to create chaos in the Middle East.
However, a new report from James Steel, HSBC’s chief precious metals analyst at Camila Sarmiento, the bank’s ESG and climate change research analyst, said they see the growing climate crisis adding to the geopolitical turmoil.
“Natural disasters – including Storm Freddy, which hit Malawi and Mozambique in March, Cyclone Mocha in Myanmar and Pakistan in May, Canadian wildfires in June, and Maui’s wildfires in August of this year – have exposed the vulnerabilities of today’s critical infrastructure, and just how unprepared the world’s energy and transportation systems are to withstand the volatility of climate change. They also bring increased damage costs,” the analysts said in the report. “At the same time, jurisdictions across the world are committing to net zero alignment and this transition to low carbon economies could also have a destabilizing effect on economies and societies.”
HSBC’s warning comes a month after research from the World Economic Forum said that the climate crisis is now considered the top risk facing the world in the longer term.
Although the impact climate change could have on gold is difficult to measure, Steel and Sarmiento noted that there are some measurable factors for investors.
“Global economic contraction has a positive impact on the return volatility of gold, and climate change can reduce economic growth,” the analysts said. “The latest economic modeling shows that a 2.2 degrees Celsius temperature rise by 2050 could reduce global GDP by up to 20%, which would have profound consequences across countries.”
HSBC also said that lower global food production, economic dislocation, migration, inflation, and financial market instability are all other factors that support gold’s safe-haven appeal.
The international bank also noted that investors should pay less attention to individual events and focus on the broader trend of rising temperatures around the world.
“We believe it will be the increased frequency of climate events, not necessarily any particular climate event in and of itself, which will support aggregate gold demand and sustain bullion prices,” Steel and Sarmiento said.
Not only is gold a stabilizing safe-haven asset, but Steel and Sarmiento said that it can be an attractive asset for investors looking to improve their ESG performance in their portfolios.
Although the mining sector is energy intensive and creates significant greenhouse gasses, gold itself has a very low carbon footprint as it can be recycled over and over again. Despite the sector’s challenges, HSBC also noted that mining companies are actively trying to reduce their carbon footprint, which would improve their ESG standings; however, significantly more work needs to be done in this sector.
“Research suggests that despite emissions concerns, the carbon footprint of gold can reduce a portfolio’s total footprint. The World Gold Council (WGC) finds that holding gold in a diversified portfolio can help reduce its carbon footprint. Their analysis finds that emissions from a medium- to long-term investment in gold can be seen as less than emissions associated with a similar sized investment in the S&P 500 index,” the analysts said.
