Gold keeps shining

Commodities, trade and currencies were front of mind for investors this week as a precious metals rally, an European Union (EU)-India trade deal and a decline in long-dated Japanese government bonds all made headlines.

Gold hit a record high on Thursday, breaking through the $5,300 per troy ounce mark for the first time on January 28 after a sustained rally that has seen the yellow metal surge in value by almost 30% month to date. Silver, copper and other metals have also taken wing over the past year.

Thursday and Friday’s trading saw a sharp reversal of prices but for Louise Dudley, portfolio manager, global equities, the rally in precious and industrial metals is a symptom of a broader shift in the market. “The rally has been striking, fueled by bullish sell-side views, sustained central bank buying, and a sense among investors that they remain under-allocated to the asset. At the same time, the traditional relationship between gold and industrial metals is less clearcut than it once was, raising questions about whether gold still acts as a reliable hedge in a risk-off environment.”

Dudley highlights how increased accessibility has broadened the investor base for gold, reinforced by the recent momentum. “While some worry that gold is now drifting into the broader risk-on trade, much of the enthusiasm reflects its strong performance and confidence that demand will persist,” she adds. “Geopolitical uncertainty adds another layer of support, with gold still regarded, at least in part, as a safe haven asset.”

A trade milestone

In other news, this week saw the signing of a landmark trade deal between India and the European Union. Yasmin Chowdhury, senior investment analyst for global emerging market equities, says it should eliminate or reduce tariffs on almost all goods traded between the EU and the world’s fifth largest economy. “We expect India’s labor-intensive industries to gain significantly, with tariffs of up to 10% set to be removed on nearly $33 billion worth of exports. While the deal protects sensitive sectors in India, it will allow unprecedented access to its tightly protected auto industry, enabling up to 250,000 European-made vehicles to enter the country at preferential duty rates.

India’s textiles, apparel, leather, footwear, marine products, gems and jewellery, handicrafts, engineering goods and autos should all see improved competitiveness in European markets. “The agreement could take a year to come into force, delaying any uplift to gross domestic product, but it will provide a near-term tailwind to sentiment and has the added benefit of creating a hedge against US trade uncertainty,” she adds.

The yen/dollar question

Uncertainty in Japan’s bond and currency markets continued last week following Prime Minister Sanae Takaichi’s decision to call a snap general election on February 8. Following the announcement, the yield on Japan’s 40-year sovereign bond rose above 4% for the first time on fears that unfunded campaign promises could trigger higher inflation.

This, in turn, prompted speculation that Japanese investors could begin to repatriate capital in response to high domestic interest rates. Since Japanese investors are the largest foreign holders of US Treasuries, it sparked renewed concern around the long-term trajectory of the dollar.

John Sidawi, senior portfolio manager for global fixed income, notes that the incessant selling of the dollar from December into this year has had investors searching for an underlying motif. “But, while market participants have been quick to turn to a tired ‘Sell America’ refrain, recent data releases show no convincing evidence of any abrupt rotation out of Treasuries or equities,” he says. “Instead, what foreign investors do appear to be doing is hedging their American holdings rather than selling them outright. This has been one of the cornerstone considerations for our ongoing bearish outlook on the dollar.”