Home About Archives RSS Feed

The Retired Investor: Gold as a Safe Haven

By Bill SchmickiBerkshires Staff
This week, gold briefly climbed above $2,000 per ounce. The precious metal is commonly thought of as an inflation hedge, but also serves a different function in times of financial stress. Gold can be a safety trade.
Gold is a highly speculative asset in the best of times. But, unlike bonds and stocks, it has one redeeming factor in times of economic slowdown, financial instability, and geopolitical tension. It does not carry the risk of an issuing entity collapsing, such as a bank or a government. There have been many examples of this throughout history.
The latest example was back in February 2022, during Russia's invasion of Ukraine. Gold spiked to $2,078 per ounce within the next month. Historically, gold has also functioned as an inflation hedge. In the aftermath of the Russian invasion, supply chain disruptions, especially in energy, food, and materials, pushed prices and the inflation rate higher. That aided and abetted the precious metals safety trade for a brief time.  
But gold's shine was diminished quickly when central banks around the world announced a tightening of monetary policy to combat rising inflation. Higher interest rates have always been kryptonite to the price of gold bullion. Gold bullion is stored for a fee, and that fee is based on the going rate of interest. Gold prices fell to $1,618 by November 2022. Higher interest rates ultimately trumped the safety trade.
As interest rate fears rose in 2023, gold continued to fall. It was largely dead money since the start of this year, trading at $1,832 per ounce just a month ago. The collapse of Silicon Valley Bank and Signature Bank in the U.S., and Credit Suisse's forced demise in Switzerland last week suddenly changed the calculus in gold investing.
As investors worried that money deposited in banks was suddenly at risk, they rushed into gold. The largest exchange-traded physical gold fund, for example, added 20 tons of gold to its ETF in a week. That was the largest single inflow of demand for gold since the Russian invasion. At the same time, yields on interest rates plummeted, as bond prices also jumped. The combination of lower rates and elevated risk provided a double boost to the gold price.
Investors need to realize, however, that in any safety trade, there is an implied risk premium that is embedded in the asset, in this case, the value of gold. The greater the risk, the higher the premium. Market Risk Advisory, a Japanese-based research firm, figures that based on historical interest rates, the price of gold should currently be trading around $880 per ounce in a riskless world. That would mean that the present risk premium, plus the impact of the decline in yields, is more than $1,000 per ounce of gold.
This week, due to the actions of the Federal Reserve Bank, the U.S. Treasury, the FDIC, as well as similar institutions in Europe, the fear of the investing public had been somewhat reduced. As a result, stocks went up and yields on most government and corporate bonds fell. As that happened, the price of gold fell more than $42 per ounce or 2.12 percent in just one day.
Does that mean that if the perceived risk of additional problems in the banking sector diminishes, the price of gold will fall further? It should--all else being equal — but all else is never equal.
Many believe that it will take some time before the banking sector returns to normal. U.S. Treasury Secretary Janet Yellen has said that she has not considered or discussed "blanket insurance" to U.S. banking deposits without approval by Congress. As such, some risk premium will likely remain in the price of gold going forward.
There is also the question of interest rates. The fear of financial contagion could deter further interest rises by the Fed in the months ahead. In addition, if the Fed feels they have tightened enough to slow the economy and reduce inflation, that would relieve the rate pressure on the price of gold. The direction of the U.S. dollar is also important to watch since gold has an inverse relationship with the greenback. The bottom line, there are more than enough reasons that could keep gold in play in the months ahead.

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.



Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
SVHC Weekly Health Update: May 26
BRO MX Ordered to Comply With Conservation Restrictions
EforAll Showcase and Gala at Hot Plate Brewing Company
Senator Mark Announces June Office Hours
What should you expect from your investments?
Grace Kelly Quartet to Perform at MCLA's Venable Theatre
Pittsfield Sees Significant Spending of ARPA Funds in First Quarter of 2023
MCLA's Rachiele Earns All-Region Honors
Pignatelli, Mark Hold Town Hall Forum
Berkshire County Remembers Veterans on Memorial Day

@theMarket (450)
Independent Investor (451)
Retired Investor (143)
May 2023 (8)
April 2023 (8)
March 2023 (8)
February 2023 (8)
January 2023 (6)
December 2022 (7)
November 2022 (7)
October 2022 (8)
September 2022 (9)
August 2022 (5)
July 2022 (7)
June 2022 (7)
Crisis Election Energy Congress Stimulus Debt Ceiling Selloff Markets Europe Oil Federal Reserve Interest Rates Bailout Commodities Currency Greece Euro Rally Economy Employment Banks Fiscal Cliff Banking Europe Debt Recession Deficit Jobs Retirement Metals Japan Stocks Stock Market Taxes Pullback
Popular Entries:
The Independent Investor: Don't Fight the Fed
Independent Investor: Europe's Banking Crisis
@theMarket: Let the Good Times Roll
The Independent Investor: Japan — The Sun Is Beginning to Rise
Independent Investor: Enough Already!
@theMarket: Let Silver Be A Lesson
Independent Investor: What To Expect After a Waterfall Decline
@theMarket: One Down, One to Go
@theMarket: 707 Days
The Independent Investor: And Now For That Deficit
Recent Entries:
@theMarket: Debt Deadline Hangs Over Markets
The Retired Investor: Rents Rising as More Americans Priced Out of Housing Market
@theMarket: Markets Signaling No Debt Default
The Retired Investor: Food Prices May Be Moderating in Some Cases
@theMarket: Stocks Playing a Game of Inches
The Retired Investor: Retiring Boomers Keep Job Gains Buoyant
@theMarket: Banks Bashed as Fed Continues to Raise Rates
The Retired Investor: Efficiency vs. Safety in America's Railroads
@theMarket: Investors Await Fed Week
The Retired Investor: Secret Behind Low Interest-Bearing Checking Accounts