Bank says gold no longer ‘risk free’

The turmoil in developed markets and the low interest rate environment globally will continue to perk up gold prices, but investors should no longer regard this commodity as a “risk-free” asset, said European investment bank Credit Agricole CIB.

In a commentary issued last week, Credit Agricole CIB said that gold’s recent rise to a record high of just over $1,911 per ounce and fall by $200 per ounce in a matter of days “should serve to illustrate to investors that any notion of it being regarded as a risk-free asset is misplaced.”

Nevertheless, the research said the longer-term financial and economic imbalances in the US and Europe and the negative real interest rate environment should continue to be supportive for the gold price.

“In a recession scenario, gold is likely to be bolstered further by its important role as an excellent portfolio diversifier and viewed as a form of insurance and as a hedge against continuing uncertainty,” it said.

Thus, the research said the dips should continue to attract good support reinforced by a pick-up in physical demand on seasonal considerations. Also, it noted that central banks have been buying the precious metal.

Citing data from the International Monetary Fund, the research noted that Russia had raised its gold holdings again in July while Colombia raised its reserves for the first time in over 13 years.

Meanwhile, Credit Agricole CIB said the ongoing macroeconomic uncertainty—such as on global growth, debt contagion and inflation—would likely continue weighing down base metals such as iron, nickel, lead, copper and zinc.

But the bank said a significant collapse in prices of base metals was not likely for two reasons.

“Firstly, investors have bought base metals for the very fact that they are tangible and hard assets. In an environment where nominal interest rates are effectively zero and real interest rates are negative the opportunity cost of holding metals is very low,” the research said.