Safe haven gold: what are investors and central banks seeking protection from?

Transcript

In the face of market turmoil – such as what we’re seeing as a consequence of Trump’s war on Iran – gold is often spoken about and used as a safe haven. Christopher Stiegeler, Director of EBC Financial Group, asks: what are investors seeking protection from? He explores the various reasons why investors – and central banks – may choose gold over any other asset, and suggests what gold traders should be asking themselves about its future.

World Finance: Chris, moving on from black gold and the source of all of this market turmoil, let’s look at actual gold – traditionally the hedge against this kind of disruption.

Christopher Stiegeler: Exactly. Gold’s often sort of mentioned, or used, as a safe haven, but the question is: what are investors seeking protection from?

And there’s several reasons that investors buy gold. One would be as a, if you like, a geopolitical hedge against geopolitical uncertainty. Another could be concern about the state of a particular government’s finances, or indeed a government. Another reason would simply be because it’s the most attractive among a basket of asset classes, none of which are particularly attractive at the moment.

Another question that’s important to mention here is that when EBC’s gold trading clients – and indeed, the gold market is rallying, and they’re buying aggressively – it’s not necessarily giving us the message that they think the economy’s collapsing, or anything like that. Gold investors might simply be saying that I want an asset, or I want to trade in an asset, that doesn’t depend on one currency, one company, or indeed one country.

World Finance: They may also be saying, well, central banks are consistently buying gold, so there’s essentially a buyer at whatever price it gets to.

Christopher Stiegeler: Yeah, I mean we’ve seen in the last quarter, the World Bank reported that central banks had bought about 290 tonnes of gold in the last quarter, something like that. And close to 50 percent of central banks surveyed said that they continued to be adding to their gold stocks over the coming year.

But even with that continued holding of gold as an asset by central banks, that’s not the central banks necessarily saying that they believe that the market’s going to go higher. A lot of this is about diversification.

World Finance: So in the context of this Iran-specific peak in gold, what should traders be asking themselves?

Christopher Stiegeler: I think what traders should be asking themselves, is, is what we’re seeing now a temporary reaction to the conflict in Iran, or is it part of a much larger change in the way that investors and traders are looking at risk?

If geopolitical tensions remain high, and we see associated increases in interest rates and so on, then gold could remain attractive.

If, on the other hand, things start to, let’s say, de-escalate, and we see a reduction in the price of crude, we start to look at lower interest rates – then gold becomes less attractive as an asset class, because it doesn’t pay interest.

It’s a trade between fear and opportunity cost, that’s the trade.

Watch more from this interview with Chris Stiegeler:
Iran, oil, and the world economy: are we seeing history repeat itself?
Could the oil shock bring back inflation? EBC director on trading peace vs disruption
EBC director: How the future of trade may be less efficient but more resilient