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Commodities Corner: Gold near record-high prices has become a costly haven for investors

Gold has jumped past $2,000 an ounce as investors seek what they perceive as a safer place to park their money against a backdrop of war and rising inflation. Prices for the precious metal moved this week toward their highest levels on record—raising red flags for extreme volatility ahead.

“Action across the global commodity markets in recent days is outside the range of anything that we have experienced in our decades as [money] managers,” says Geetesh Bhardwaj, head of research at SummerHaven Investment Management.

On March 8, gold futures
GC00,
+0.48%

GCJ22,
+0.48%

settled at $2,043.30 an ounce, not far from $2,069.40 an ounce, the highest price finish based on records dating back to January 1975. Prices retreated the next day, to $1,988.20.

Along with the move in gold, other metals have rallied, with silver futures touching their highest levels in nine months, palladium and copper reaching record highs, and oil’s value climbing to levels not seen since 2008. “The big-picture setup for markets has provided a perfect storm to send investors rushing to embrace gold as a safe haven,” says Bhardwaj.

With gold seen as an inflation hedge benefiting from a risk-off trade, and the potential for supply disruptions from Russia, one of the world’s largest producers of the metal, prices may still have room to climb, he says. “Nothing stokes the gold bugs like the risk posed by a war,” says Bhardwaj, and recent inflation data indicate that price pressure is “unlikely to recede anytime soon.”

Before Russia’s invasion of Ukraine on Feb. 24, concerns that the Federal Reserve and other central banks would be forced to raise benchmark interest rates to fight a surge in global inflation had put some pressure on gold prices. Higher rates can boost the dollar and make gold less competitive against interest-bearing investments.

However, in remarks prepared for congressional testimony earlier this month, Fed Chairman Jerome Powell said he was inclined to support a 25-basis-point increase following the end of its two-day meeting on March 16. There had been earlier speculation of a bigger, half-percentage-point hike.

Given record global debt balances, the real plan for the Fed is “fake taper,” which Peter Grosskopf, chief executive officer of Sprott, explains is “jawboning” by Fed officials about multiple interest-rate hikes and removal of other stimulus programs, which are unlikely to be implemented.

Events in Ukraine and the oil price spike are “second- and third-level shocks that add to deeply negative real rates and high inflation to drive investor buying of gold,” he says. Meanwhile, the audience for the metal is “much broader now than on previous rallies, as investors seek a counterbalance to inflation and corrections in other financial markets,” he says, adding that investors’ portfolios should have precious metals, and related equities, as a 5% to 10% allocation.

The best approach for investors would be to “get minimum exposure quickly,” and consider gold equities, which have lagged but are still “cheap and have much leverage to gold price upside,” Grosskopf says. “Then, slowly and relentlessly buy more on any dips to the desired allocation.”

For those who have yet to participate in a market that has seen gold prices climb by nearly 9% year to date, however, Bhardwaj warned that price volatility will continue.

“ “Anyone thinking of buying now needs to understand that they will be facing a very bumpy ride ahead, and sudden, volatile pullbacks are likely as markets react, and overreact, to geopolitical events.””

— Geetesh Bhardwaj, SummerHaven Investment Management

“Anyone thinking of buying now needs to understand that they will be facing a very bumpy ride ahead, and sudden, volatile pullbacks are likely as markets react, and overreact, to geopolitical events,” he says. Inflation and policy uncertainty are “here to stay,” but a “return to sanity in Europe would spark a correction in gold markets.”

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