06 March 2022
After peaking above $2,000 an ounce in June 2020, gold prices have hovered around $1,800 an ounce for most of the past 18 months. More recently though, momentum appears to have turned positive, with 31 grams of the precious metals changing hands for close to $1,900 an ounce. While higher real interest rates have been (and may continue to be) a strong headwind, geopolitical tensions and continued inflationary pressures have been strong supports for the price.
The encouraging start to this year for the yellow metal has happened at a time when both stocks and bonds were struggling, while the value of most cryptocurrencies, often dubbed “digital gold”, have experienced huge swings. As such, the recent price action reinforces our view that precious metals – and gold in particular – can be useful diversifier in portfolios.
The last time oil prices traded below zero may only be two years ago, but it appears to be a distant memory now. While investors seem obsessed about whether spot oil prices will break $100 a barrel, the curve is sending a different signal. Indeed, the curve’s “backwardation” (occurring when spot prices are higher than those for futures) is as steep as it has been in the last 30 years.
While backwardation is typically a bullish sign for commodity prices, we would caution against excessive optimism. Indeed, in this particular case it looks like a significant short-term premium has been factored in, most likely due to the rising tensions between Ukraine and Russia. Should the risk of a potential conflict dissipate, oil prices would be vulnerable.
If there is one chart that encompasses the huge dislocations caused by the pandemic, it is the yield on the US government 2-year Treasuries. After collapsing in early 2020, it stayed near zero for close to 18 months, before rebounding to pre-pandemic levels in a few weeks. This “U-shaped” recovery is unprecedented, and, unsurprisingly, a source of uncertainty and volatility.
Investors should pay close attention to the 2-year yield. Not just in absolute terms, but also relative to other points of the curve, especially the 10-year. Until more signs of stability emerge, the road ahead looks bumpy.
It’s not just 2-year Treasury yields that are shooting higher. In the US, the effective cost of 30-year mortgages has added a full percentage point, from 3.2% to 4.2%, in recent weeks. As it becomes increasingly more expensive to finance new house purchases, existing home sales are now declining on a year-over-year basis.
While some base effects may be at play, home sales jumped in early 2021 after being constrained by the pandemic, more hikes in mortgages rates could seriously hit the sector, and more broadly the American economy. As the US Federal Reserve (Fed) ponders whether to divest mortgage-backed securities it owns, this is something it should keep in mind.
The Chinese currency is trading below 6.40 yuan to the US dollar, its strongest level since 2018, just before the US started placing tariffs on the country’s exports. The appreciation of the yuan since the middle of 2020 has been a consequence of the expanding trade surplus, which hit a record high of $94.5 billion in December.
Foreign inflows have also played their role. A year ago, Chinese 10-year government bonds were yielding close to 3.3%, and were targeted by global investors. Today, the yield is around 2.8%, just 80 basis points above its US equivalent. In this context, Chinese bonds may not be as attractive anymore. In addition, with a government looking for ways to stimulate growth and global demand switching to services from goods, the Chinese currency may struggle to rise further.
Welcome to the March edition of "Market Perspectives", the monthly investment strategy update from Barclays Private Bank. In this month’s report, we look at just how likely a recession might be, and what it could mean for equities, bonds, and other asset classes.
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