SocGen maintains safe haven exposure to gold even as price action remains lackluster

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(Kitco News) – Gold market may continue to suffer as Federal Reserve’s aggressive monetary policy strategy pushes bond yields and U.S. dollar higher; however, one bank still views it as a critical asset to hold in the current environment of heightened uncertainty.

Societe Generale analysts said in their fourth quarter multi-asset portfolio report that they are maintaining their exposure to gold even as they reduce their overall exposure to commodities. Analysts said it would be important to have exposure to gold as a safe-haven asset as central banks continue to push the global economy closer to a recession.

The bullish outlook for gold comes as prices are trading near a two-year low, testing critical long-term support at $1,675 an ounce. Last week, commodities analysts at Banque Francaise warned that rising real bond yields could send gold prices crashing to $1,550 by the third quarter of next year.

Although gold prices may decline, SocGen remains overweight gold.

“In the near term, gold could continue to suffer from higher real yields, themselves pushed higher by further rate hikes from the Federal Reserve. However, from a portfolio construction perspective, with increasing recessionary forces expected at play and persistent inflation, in addition to the central Fed (calling the USD peak itself), gold appears to be a very defensive asset in times of turmoil,” the analysts said in their latest report.

The French bank added that it preferred gold to long-dated stocks.

“We believe defensive assets such as gold are preferable as we expect them to outperform first. The main reason is that the earnings growth outlook for US stocks is likely to deteriorate in 1H23 due to of a strong dollar, a weaker oil price, and the likelihood of a continued economic slowdown,” the analysts said.

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

“After a strong year-to-date performance, some commodities are facing the twin challenges of slowing demand and a potential improvement in the supply situation. “, said the analysts.

The bank’s overall portfolio strategy is to become somewhat more defensive through year-end as the Federal Reserve’s commitment to fighting inflation through rate hikes brings 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 U.S. labor market to stop overheating. Growth expectations are clearly under threat, given the prospect of impending restrictive actions by banks (central and commercial),” the analysts said. analysts. “As the ECB has yet to officially announce balance sheet liquidations (bearish euro bonds), we feel safer with US Treasuries as we believe the credibility of the Federal Reserve will continue to anchor expectations of inflation below 2%. Indeed, we consider US Treasuries to be one of the few assets that have already priced in many of the risks ahead.”

The bank is also increasing its holdings of US dollars to 10% of its portfolio strategy, even though it views the greenback as overvalued.

“The main reason for this is not the euro, but China – given the cycle of deteriorating growth and the possibility of substantial monetary easing in this country, the inflation of producer prices and consumption continuing to fall,” the analysts said.

Finally, SocGen analysts also warned investors that while markets no longer expect the Federal Reserve to change monetary policy anytime soon, that moment will eventually come and investors should be prepared to act quickly.

“Three key quick actions can be taken: reduce the USD weighting in our portfolio, reweight cheap emerging assets across the spectrum (most currencies, bonds and equities) and reweight base metals. expect a clear floor of $6,000/tonne for copper, which we see as an entry point to meet growing decarbonization demand,” the analysts said.

Due to the risk of ever-higher inflation, markets expect the Federal Reserve to tighten monetary policy aggressively until at least the first quarter of 2023. Markets see the Fed Funds rate rising to 5% and stay there for most of next year. . SocGen analysts said they see rates capped at 4.50% and a pivot will occur in the third quarter of 2023.

Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of 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 strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.

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