SocGen maintains safe-haven exposure to gold even as price action remains lackluster – Kitco NEWS | Jewelry Dukan

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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 higher; However, a bank still sees it as 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 maintain their exposure to gold even as they reduce their overall exposure to commodities. Analysts said a safe haven exposure to gold will be important as central banks continue to push the global economy closer to recession.

The bullish outlook for gold comes as prices trade near a two-year low and test critical long-term support at $1,675 an ounce. Last week, commodities analysts at the Bank of France warned that rising real bond yields could push gold prices as high as $1,550 by the third quarter of next year.

Although gold prices may fall, SocGen remains overweight gold.

“In the near term, gold may continue to suffer from higher real yields, which are themselves being buoyed by further Federal Reserve rate hikes. However, from a portfolio construction perspective, with expected rising recessionary forces at play and inflation stubbornly above the Fed Pivot (call the peak of the USD yourself), gold looks like a very defensive asset in troubled times,” the analysts said in their latest report.

The French bank added that it prefers gold over long-duration stocks.

“We think defensive assets like gold are preferable as we expect them to outperform first. The main reason is that 1H23 earnings growth prospects for US equities are improving due to a strong USD, a weaker oil price, and the likelihood of a prolonged economic slowdown,” the analysts said.

SocGen has reduced its overall portfolio commodities weighting by 5 points to 10%. Gold currently accounts for a total of 7% of the portfolio’s commodity holdings.

“Following a strong year-to-date performance, some commodities are facing the twin challenges of slowing demand and potentially improving supply. The drop in demand will weigh on many commodity prices, driven by changes in spending behavior driven by a drop in purchasing power and cyclical headwinds,” the analysts said.

The bank’s overall portfolio strategy is set to become somewhat more defensive by the end of the year as the Federal Reserve’s commitment to fight inflation by raising interest rates pushes the economy closer to a recession.

The bank increases its exposure to US Treasuries to 25%. At the same time, exposure to global bonds increased by 33%.

“There is no doubt that the Fed wants the US jobs market to stop overheating. Growth expectations are clearly at risk given the prospect of forthcoming tightening measures by (central and commercial) banks,” the analysts said. “With the ECB yet to officially announce balance sheet losses (bear euro bonds), we feel more secure on US Treasuries as we believe the Federal Reserve’s credibility will continue to anchor inflation expectations below 2%. In fact, we are considering US government bonds as one of those rare assets that have already priced in many of the risks ahead.”

The bank is also increasing its US dollar holdings to 10% of its portfolio strategy, despite viewing the greenback as overvalued.

“The main reason for this is not the euro but China – given the economic slowdown cycle and scope for significant monetary easing there as both producer and consumer price inflation continue to fall,” the analysts said.

Finally, SocGen analysts also warned investors that while markets are no longer expecting the Federal Reserve to change 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: reducing the USD exposure in our portfolio, rebalancing cheap EM assets across the spectrum (most currencies, bonds and equities), and rebalancing base metals. We see a clear bottom of $6,000/tonne for copper, which we view as an entry point to align with rising decarbonization demand,” the analysts said.

Given the risk of persistently higher inflation, markets expect the Federal Reserve to aggressively tighten monetary policy through at least the first quarter of 2023. Markets anticipate that the Fed’s interest rate will rise as high as 5% and stay there for most of next year. SocGen analysts said they expect rates to be capped at 4.50% and reversed in the third quarter of 2023.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of the author Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. It is not an invitation to exchange goods, securities or other financial instruments. Kitco Metals Inc. and the author of this article assume no responsibility for any loss and/or damage resulting from the use of this publication.

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