Gold is considered by many investors to be the perfect safe-haven asset during an economic recession or crises. This statement is not entirely accurate.

Crises are, markedly deflationary (negative inflation) due to high debt levels. Investors search for assets with positive real interest rates (nominal rate less inflation), such as Treasury bonds.

Gold has always been an asset that has attracted investors throughout history. It was used as a payment measure in ancient civilizations, and in more recent times the gold standard was the international monetary system.

Reports are currently appearing of the difficulties being encountered by investors in obtaining gold bullion, as a result of financial market fears and production problems resulting from global measures taken due to coronavirus.

However, in reality, the price of gold largely depends on trends in US real interest rates, i.e. nominal rates less expected inflation. In the below chart, we compare gold (light blue) with the US 5-year real interest rate (dark blue, inverted scale). The lower the real rate, the higher the price of gold.

There are two main risks to gold.

1. The rates offered by US sovereign debt rise significantly – something that we can rule out in the current recession scenario-.
2. The deflationary pressures intensify -a situation we can expect to happen-.

Short-term deflation is a real risk, despite the best efforts of the authorities, with various monetary stimuli being provided recently by several central banks. If economic activity continues at these levels, demand will remain low and could trigger deflationary periods.

There is also a risk of deflation in the long term, as demographics drives economic fundamentals: specifically, an ageing population combined with a slowdown in the global birth rate.

During the 2008 crisis, gold fell by more than 30%, a significant drop for a defensive asset. We consider that investing in gold requires caution due to the risks it involves and also because it does not offer investors a recurring income, unlike other assets:

• Equity – dividends
• Fixed-income – coupons
• Currency – interest rate
• Real estate – rental income

For any question related to investment, please do not hesitate to contact your advisor relationship manager.