Jim Steel - Gold is Sensitive to Geopolitical Risk

 

Jim Steel

2020 has seen a “phenomenal” inflow of gold-backed exchange-traded funds, fueling an investment-led rally, but while ETF inflows are still expected to be strong, 2020’s level of inflows would be hard to keep up. Jim Steel, chief precious metals analyst at HSBC, said that gold will average a price of $1,965 an ounce in 2021, owing to competing macroeconomic forces; accommodative monetary policy will continue to provide tailwinds, but an unwinding of geopolitical risk from a Biden Administration will ease the appetite for gold. “Gold is sensitive to geopolitical risk,” he said. “If we’re going to get some rapprochement on the trade issues between the United States and the other countries, and it’s not just one country, it could be from several, and we also get a charm offensive from the Biden Administration to U.S. allies or to others, and the geopolitical risks come down and there’s progress made on the trade front, then that would be negative for gold.”

Global Macro strategies have largely been supported by their beta contribution in 2019, with both equities and bonds delivering strong returns. Alpha conditions have been more challenging. Transversal speculative drivers have dominated asset trends and were volatile. There has been multiple stop and go’s regarding Brexit, the trade and tech conflicts with wide asset implications. A cyclical false-start early 2019 and a macro inflection shaping up by year-end were, as always, challenging to capture. Additionally, central banks’ pre-emptive easing to stem a manufacturing-driven slowdown flushed markets with liquidities, distorted valuations and unsettled the equity/bond correlation.
 
We expect a lower beta contribution in 2020 and less market directionality. A modest economic recovery and fair-to-rich asset valuations could lead to more muted performance. Our indicators of market directionality are peaking and are consistent with cross-asset correlation and dispersion reverting to average levels. This would contribute to lower the bar for managers to beat their benchmark, while calling for more relative arbitrage. Looking backward, buy-and-hold strategies were rewarded best in 2019. We expect market-timing to matter more than in 2020, with investors becoming more sensitive to risks and sentiment as the cycle matures.
 
Moreover, we expect less distortion from policy uncertainties and central banks. Both factors deeply impact fundamental approaches and alpha. Central banks are shifting to a dovish pause and uncertainties could recede with prospects of a trade war truce and an orderly Brexit. As a result, we expect more fundamental pricing, with asset prices moving closer to their own fundamentals, a key pattern for managers. Asset prices discrimination would also rise. Monetary and fiscal policies aim at curbing economic mechanisms and economic volatility, which can prevent managers to monetize a macro trend they successfully identified.
 
There might be a greater variety of themes to arbitrage in 2020, as investors start to care more about micro developments. For now, we observe that our multiple top-down and more focused thematic baskets are still highly correlated with limited differentiation. Trades become implicitly crowded with uneasy risk management.
 
Finally, the news flow and economic updates would share more light on the current macro inflection. Greater clarity could translate in more conviction calls and leverage.
 
We find that differentiation is rising across the basket of global macro funds we monitor. The receding correlation of funds return sends an encouraging sign that managers are increasingly positioned on different opportunity sets.