almost 3 years ago • 3 mins
Gold might look like the ticket to protecting your portfolio, but BlackRock – the world’s biggest investment manager – thinks some of that shine is starting to rub off.
What does this mean?
Investors typically think of gold as a hedge: it protects them from the cash-eroding effect of inflation by rising alongside the prices of goods and services, and – given that investors usually buy into the metal in times of turmoil – from stock market drops too.
But BlackRock thinks those truisms are flawed: they might justify holding gold for hundreds of years, sure, but very few investors tend to last that long. Over much shorter time horizons, the metal’s relationship with inflation and stocks isn’t actually all that strong. Instead, BlackRock reckons the best hedge is cold hard cash – especially while inflation is so low.
Why should I care?
Zooming in: Gold’s still got a few tricks up its sleeve...
At least gold’s relationship with the US dollar is holding up: the metal’s price usually rises when the dollar’s value falls relative to other currencies, and BlackRock doesn’t think that’ll change any time soon. That’s because gold is priced in dollars, so a cheaper dollar – all else equal – makes the commodity look cheaper to non-US buyers. And if that tempts them to buy in, its price might still have room to rise.
The bigger picture: … but an economic recovery isn’t one of them.
Gold might become more valuable over time, but it doesn’t earn investors dividends or interest payments along the way like a stock or bond might. So as the economy recovers, inflation picks up, and interest rates rise, income-focused investors who are finally able to make decent returns elsewhere might start to lose interest in the metal altogether.
Keep reading for our next story...
Here’s something to help investors chill out in these stressful times: the European Central Bank effectively promised on Wednesday to keep eurozone bond yields from rising.
What does this mean?
Just like the US, the eurozone’s pumped huge sums of money into its economy to keep things ticking over throughout the pandemic. And now that a recovery’s on the cards, investors have started to worry all that cash will send product prices higher – and that inflation will then force the region’s central bank to prematurely raise interest rates.
But while the ECB acknowledged inflation had picked up, it seemed confident that it was a short-term feature fueled in part by tax hikes and higher energy prices. Over the medium term, it reckons, inflation still won’t hit its long-standing target. Now, then, the central bank’s plan is to leave interest rates where they are and speed up its bond-buying instead.
Why should I care?
For markets: The ECB is keeping bond yields down.
By accelerating its bond-buying, the ECB will increase demand for eurozone bonds. That should push their prices up and their yields down, which should signal to countries, companies, and investors alike that borrowing money in Europe is still cheap. And that, in turn, should hopefully encourage them to invest in economy-growing activities. The announcement alone worked a treat: Italy’s 10-year government bond yields dropped almost immediately afterward.
The bigger picture: Central banks’ messaging isn’t always straightforward.
For investors, the ECB’s message was clear: rising bond yields are a concern even if inflation isn’t. If only the Federal Reserve’s thinking was as easy to follow: the US central bank confused investors recently when it said it wasn’t anticipating making any changes to its interest rate policy. That’s despite the country’s improving economic growth outlook, which would usually come with at least the hint of a future adjustment…
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