As Fed preps a cut, gold fever breaks out in new ‘bubble game’

Federal Reserve building. Image from archives.

A top-ranked strategist at Societe Generale SA has a plan for clients fretting that a fresh wave of monetary easing will fan a bubble across assets.

Ride the bull until 2020 — when a U.S. recession and a debased dollar will make gold the perfect doomsday hedge, says Alain Bokobza. It’s the latest warning for investors betting that the Federal Reserve will help extend the business cycle with stimulus this week, and a sign of how gold fever is breaking out from London to New York.

“Gold is the perfect response if you’re entering the bubble game”

Alain Bokobza

“Gold is the perfect response if you’re entering the bubble game,” the head of global asset allocation said in an interview in London. “Every time you have such a situation, gold has soared,” said Bokobza. His team ranks first among multi-asset strategists in the 2019 Extel survey.

Worrywarts have long clung to bullion as the ultimate store of value in a low-rate world, but the sentiment is growing as the global pile of negative-yielding debt sits near $14 trillion and central banks shift to dovish mode. Exchange-traded funds holding precious metals have taken in around $4 billion this year, while hedge fund Crescat Capital is starting a long-only strategy focused on mining stocks.

The SocGen strategist says bullion will defend traders against a weakening dollar, while providing a bulwark against a U.S. recession next year sparked by trade wars and a slump in corporate-profit growth.

“Gold is one of the most correlated assets to the U.S. dollar — rising most of the time when the dollar falls, and thus a good hedge against a falling U.S. currency.”

The CEO of UBS Group AG warned last week of “dangerous” bubble risk spurred by central banks. For investors, the dilemma is that risk assets like stocks keep rallying to records even as fears grow over monetary impotence.

SocGen strategists were rewarded for their cautious outlook last year when easing economic momentum and higher U.S. rates adjusted for inflation spurred a sell-off across markets. But some of their bearish projections for 2019 have misfired as the S&P 500 surged to a fresh record.

“When momentum is so strong, it’s not so easy to go against it,” said Bokobza. “That’s why we haven’t recommended risk-averse asset allocation. But we have recommended assets that offer diversification.”

The team is underweighting equities, while overweighting government bonds and credit and holding about 5% cash. Commodities is at its 10% maximum weight.

Gold fever

HSBC Holdings Plc recently reaffirmed gold’s role as a haven in a study, showing it’s one of the few reliably uncorrelated assets around. The commodity is trading near a six-year high as U.S. real yields decline.

“Precious metals are one of the few pockets of this market offering tremendous value to hedge against extreme monetary policies, bursting asset bubbles, and record global leverage,” Kevin Smith, chief investment officer at Crescat, wrote in a recent investor letter.

He calls precious metals “incredibly undervalued” relative to other assets. Smith is also bullish on miners, which tend to outperform the underlying commodity but which trade at a discount to global equities. The VanEck Vectors Gold Miners ETF is down more than 10% over the past three years compared to a gain of about 30% for the MSCI World.

“A new awareness of global fiat currency debasement polices is now in its early stages,” Smith wrote. “Gold should become a core asset for those who believe in this macro development.”

(By Ksenia Galouchko, with assistance from Eddie van der Walt)


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