Every now and again we get asked, 'What has changed so dramatically to warrant such a significant shift in gold sentiment over a relatively short amount of time?' From a bearish stance in Q4 last year, attitudes have turned remarkably positive by the end of Q1 2016
Global markets entered a phase of heightened risk aversion following the global financial crisis (GFC). In Global Macro Strategy, we expect current high levels of risk aversion to decline, but accommodative policy is needed to reassure markets. This creates a good opportunity for gold to assert its value as a diversifier within a portfolio.
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On the one hand, a regime of heightened risk aversion encourages investors to want to hold an insurance against tail risks such as gold.
On the other hand, a decline in risk aversion would divert some of the interest away from gold towards risky assets, but easy policy would underpin gold via a flatter dollar and low real rates. Both scenarios present a case for holding some part of a portfolio in gold, and support our view that gold's performance this year is more about strategic reallocation, which in turn suggests that gold would be resilient to bounces in risk appetite.
Our 3-month target of $1250 captures this view and the expectation that gold would remain in consolidation phase, especially during these seasonally slower months, to digest the length that has been built up this year.
The market may experience some downside pressure around the June FOMC meeting, but continuing interest to buy dips should keep prices supported overall.