Since the start of America and Israel’s war with Iran, the price of gold, generally considered a hedge against geopolitical uncertainty, has slumped more than 11%.
Compare that to the last major outbreak of conflict, when Russia’s invasion of Ukraine sparked the beginning of a record-breaking gold rally, and one may wonder why investors are no longer flocking to the safe-haven metal.
Gold tends to rise in times of war, when geopolitical uncertainty makes currencies, stocks and bonds volatile. In 1979, when the Iranian revolution caused the price of Brent crude to skyrocket, gold surged to its own record high.
“Gold hasn’t stopped being a safe haven, but in this war, cash has been the first choice for safety,” said MP9 Asset Management chief investment officer Aheesh Singh.
“This time, the destination has been cash and money market funds. Investors opted for short-term dollar assets, T-bills, very short-dated bonds, places where they can earn a yield, keep liquidity and avoid taking a lot of interest rate risk.”
A handful of factors lie behind this shift. For one, real government bond yields have leapt since the US began bombing Iran, reflecting fears that a higher oil price will fuel a wave of inflation, forcing central banks to hike interest rates.
In times of high interest rates, gold, which offers no return apart from capital growth, is less attractive than interest-bearing assets such as bonds.
Gold hasn’t stopped being a safe haven, but in this war, cash has been the first choice for safety.
— Aheesh Singh, MP9 Asset Management chief investment officer
Plus, inflation is now substantially lower than it was during the early days of the Russia-Ukraine conflict (when economies were still benefiting from post-Covid stimulus), making the real yield of government bonds markedly higher than in 2022.
“During the early part of the Russia-Ukraine war, economies globally experienced low or negative real yields. In that kind of environment, gold looks good; it doesn’t pay interest, but you’re not giving up much by holding gold instead of cash or bonds.
“With Iran, expectations for higher inflation in the future have increased. Central banks may not be able to reduce rates like they once thought. Higher real rates are usually bad for gold, because gold doesn’t earn anything, while cash and short‑term instruments look quite attractive," said Singh.
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The TIPS (treasury inflation-protected securities) yield, a market-based gauge of real yields in the US, rose to 1.77% in the early days of the Iran conflict, compared with a negative yield of 0.96% in the first days of the Russia-Ukraine war.
“That difference is one of the indications as to why gold had a much stronger investment case during the Russia‑Ukraine war than it does now."
South Africa’s bond yields, which were at multiyear lows before the war, have also risen sharply. By mid-February, the yield on the 10-year bond was quoted at 7.5%, while those of the 20- and 30-year bonds were approaching 8%.
On Monday, however, the yield on the blended 10-year bond was at 9.01%, the 20-year 9.78% and 30-year paper 9.6%.
Outside the bond market, some profit-taking is probably behind March’s sell-off of gold, with the metal’s price having been above $4,000 for nearly six months.
Part of gold’s attraction is its liquidity, and central bankers, along with investors, may simply be cashing in on the elevated price ahead of tougher times.
Schroders senior portfolio manager James Luke said concern about short-term fiscal stress, including fears that some countries’ central banks are using their bullion reserves to fund defence spending, may be spurring gold sales.
In the longer term, however, the “debasement” trade, driven by broader fiscal concern over unsustainable debt burdens and a shift away from the dollar in reaction to its weaponisation against Russia and China, continues to support gold’s investment case.
“Even if the crisis becomes prolonged, we expect, once near-term knee-jerk selling is exhausted, that gold would begin to break its near-term negative correlation with oil markets,” said Luke.
The recent gold sell-off has dealt a substantial blow to the JSE’s biggest mining companies. The precious metals and mining index was down by more than a fifth in March, contributing to the all share’s worst month since the 2008 global financial crisis.
Sibanye-Stillwater, which mines gold and platinum group metals, saw its share price plunge about 27% in March, while gold mining giant AngloGold Ashanti shed more than 18%.
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