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(Kitco News) – The gold market may continue to suffer as the Federal Reserve’s aggressive monetary policy strategy drives bond yields and the US dollar rises; However, one bank still considers it an essential asset to hold in the current environment of heightened uncertainty.
Analysts at Société Générale said in their fourth-quarter multi-asset portfolio report that they are maintaining their exposure to gold even as they reduce their overall commodity exposure. Analysts said exposure to gold as a safe asset will be important as central banks continue to push the global economy closer to recession.
The optimistic outlook for gold comes with prices trading near a two-year low, and testing important long-term support at $1,675 an ounce. Commodity analysts at the French bank warned last week that higher real bond yields could push gold prices as low as $1,550 by the third quarter of next year.
Although gold prices could drop, Societe Generale still has an overweight on gold.
“In the short term, gold could continue to suffer from higher real yields, as they are being pushed higher by further Fed rate increases. However, from a portfolio building standpoint, with increasing recessionary forces expected at play and flat inflation, on “As a pivot (dubbed the top of the US dollar itself), gold appears to be a very defensive asset in tough times,” Fed Headed Analysts said in their latest report.
The French bank added that it preferred gold over long-term stocks.
“We believe defensive assets like gold are preferable, as we expect them to outperform first. The main reason is that US earnings growth expectations are likely to worsen in the first half of 23 on the back of a strong dollar, lower oil price, and the possibility of a continuing economic slowdown.”
SocGen reduced the total weight of items in the portfolio by 5 points to 10%. Gold currently accounts for 7% of the commodity holdings in the portfolio.
“After strong performance since the beginning of the year, some commodities are facing the dual challenge of slowing demand and improving potential supply situation. Demand destruction is set to affect many commodity prices, as a result of spending pattern changes caused by lower purchasing power and cyclical headwinds,” analysts said.
The bank’s overall portfolio strategy is to become a bit more defensive through the end of the year as the Fed’s commitment to fighting inflation by raising interest rates pushes the economy into recession.
The bank is increasing its exposure to American treasures to 25%. At the same time, exposure to global bonds increased by 33%.
“There is no doubt that the Fed wants the US labor market to stop overheating. The growth outlook is clearly at risk, given the prospects for imminent (central and trade) restrictive actions by the banks,” the analysts said. “As the European Central Bank still has to formally announce the rollbacks in the balance sheet (loaded Eurobonds), we feel much safer with US Treasuries, as we believe the Fed’s credibility will continue to hold inflation expectations below 2 %. In fact, we consider US Treasuries to be a rare asset that is already priced in the many risks ahead.”
The bank is also increasing its holdings of US dollars to 10% of its portfolio strategy even as it sees the US currency as overvalued.
“The main reason for this is not the euro, but China – given the cycle of de-growth and the scope for significant monetary easing there as producer and consumer price inflation continues to decline,” the analysts said.
Finally, Societe Generale analysts also warned investors that while markets no longer expect the Federal Reserve to direct its monetary policy any time soon, that time will eventually come, and investors should be prepared to act quickly.
“Three key quick actions can be taken: reduce the weight of the US dollar in our portfolio, rebalance cheap emerging market assets across the spectrum (most currencies, bonds and equities) and rebalance base metals. We see a clear bottom of $6000/ton for copper, which we see as an entry point to prepare The growing demand for decarbonization.”
Given the risk of persistently high inflation, markets expect the Federal Reserve to tighten monetary policy sharply until at least the first quarter of 2023. Markets see the fed funds rate rise to 5% and stay there for most of next year. Analysts at Societe Generale said they see an interest rate ceiling of 4.50% and see a pivotal coming in the third quarter of 2023.
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