After a strong increase at the beginning of the year, the gold market is undergoing a significant correction. According to Russ Koesterich - Portfolio Manager of BlackRock's Global Asset Allocation division, although gold is facing many short-term unfavorable factors, long-term reasons to hold the precious metal remain.
According to Koesterich, gold prices have fallen by about 25% compared to the record high set in January and are about 7% lower than at the beginning of the year.
The previous strong increase also partly changed the role of gold in the portfolio. When prices continuously rise with high momentum, the precious metal no longer simply plays a defensive role, but it itself also becomes a source of volatility.
According to Koesterich, instead of providing protection when the market goes down, at times gold increases the portfolio risk.
The USD becomes a major drag on gold prices
Koesterich believes that the reversal of price momentum only partially explains the months-long correction. One of the more important reasons lies in the strong recovery of the USD.
According to data released by BlackRock experts, the Dollar Index (DXY) has increased by more than 6% compared to the low set in January.
The recovery of the greenback took place in the context of market concerns about a global energy shock, US stocks maintaining resilience and expectations for the policy of the US Federal Reserve (Fed) changing sharply.
A strong USD often puts pressure on gold because the precious metal is valued in USD, making holding costs more expensive for buyers using other currencies.
Not only the USD, real yields in the US also increased significantly.
Koesterich said that the 10-year real-term yield, determined from the US anti-inflation Treasury bond market (TIPS), increased from about 1.65% in early March to 2.20%.
The change in the interest rate environment becomes a significant obstacle for gold. As real yields increase, the opportunity cost of holding an asset that does not generate cash flow like gold also increases.
Cash flow is being drawn to the AI stock group
Another factor mentioned by Koesterich is the change in investor appetite in the financial market.
Cash flow on the stock market is increasingly concentrated in a relatively small group of businesses related to artificial intelligence (AI) with outstanding profit growth rates.
In an environment where investors prioritize profits and cash flow, gold – an asset that does not generate corporate profits – is being somewhat overshadowed.
Koesterich compares how the market treats gold today with stable but low-growth businesses: investors do not necessarily sell off, but attention and cash flow are heading towards assets with more attractive growth prospects.
BlackRock still sees reason to maintain gold
Although pointing out a series of obstacles, Koesterich does not believe that the long-term argument for gold has disappeared.
According to BlackRock experts, debt and budget deficit remain at historical highs, while the risk of currency devaluation remains a long-term risk. The geopolitical environment has not yet become more stable.
These are factors that continue to strengthen the role of gold in a diversified investment portfolio.
Instead of giving the view that the proportion of gold must be strongly increased, Koesterich believes that the current conditions still create a basis for investors to maintain a moderate gold position in their portfolio.
This also shows that BlackRock's expert's view focuses more on the long-term strategic role of gold, rather than predicting a specific target price in the short term.
On the market, gold is heading towards ending the week with an increase as it continues to accumulate around important support zones. At the time of the source's update, spot gold price was 4,004.70 USD/ounce, up 1.45% compared to the closing level of last week.
Thus, although gold prices have adjusted about 25% from the peak and are facing pressure from the USD, real yields as well as the shift of cash flow, BlackRock still sees structural factors supporting the maintenance of gold in the long-term portfolio.
*Note: The above assessment reflects the opinion of BlackRock expert on the role of gold in the investment portfolio, not price forecasts or gold buying and selling recommendations.
