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Big investors have turned to gold and the US dollar rather than the traditional safety of government bonds, as anxiety grows over an inflation shock threatened by the war in Iran.
Gold raced close to a record high on Monday, jumping as much as 2.6 per cent to more than $5,400 a troy ounce, as drone strikes on Qatar’s natural gas facilities raised fears of a new energy crisis. It was later up 0.7 per cent on the day.
But government bonds, typically a haven in stormy markets, weakened as traders braced for a rise in inflation, pushing the yield on two-year German Bunds up 0.08 percentage points to 2.09 per cent.
“We are seeing bonds again failing to provide protection against risk-off events, even as gold delivers,” said Seb Barker, chief market strategist at hedge fund firm Marshall Wace. He said events in the Gulf “reinforce” the case for increasing allocations to what he called “non-bond safe haven assets”.
Analysts at the BlackRock Institute said the market reaction showed “long-term government bonds are not reliable portfolio ballast given the potential stagflationary risks from an escalation of this latest Middle East conflict”.
Robert Tipp, head of global bonds at PGIM, said that gold was benefiting from a “global uncertainty premium” that questions: “What is a safe haven in the current environment? What is a neutral asset?”
As Iran broadened its attacks against energy infrastructure from Qatar to Saudi Arabia, some traders girded themselves for a lasting conflict.
“Wars always last longer than we think they will,” said a senior trader at a large Wall Street bank, highlighting the dollar and gold as the major haven trades.
The greenback was up 0.9 per cent on Monday against a basket of its peers, playing its typical role as a haven in FX markets at times of stress that are not focused on the US.
The growing uncertainty prompted some big asset managers to cut their holdings of stocks.
French fund house Carmignac has been reducing its equities exposure, including in Japan, and was considering doing so for oil-related stocks that have surged, said Kevin Thozet, a member of its investment committee. He added: “We’re taking some risk off the table, because . . . the distribution of possibilities is quite large.”
As well as buying S&P 500 put options to hedge against potential falls in the blue-chip index, Thozet said that Carmignac was keeping some of the money it had pulled out of equities in cash, given the risks that an inflation surge would pose to government bonds.
Beata Manthey, head of global equities strategy at Citi, said the bank had downgraded Japanese equities from overweight to underweight given that market’s particular exposure to higher oil prices, and had upgraded UK stocks, which are heavy in defence and energy names.
“If the situation worsens, investors will be taking risk off where they can, so you will have a more co-ordinated sell-off,” she added. “For now . . . it’s still relatively selective.”
Gold was a beneficiary of the broader sell-off and has now eradicated most of the losses it incurred during a sharp pullback in January.
“Gold has time and again defended its role as the ultimate safe haven in periods of heightened uncertainty and risks,” said Imaru Casanova, portfolio manager for precious metals at VanEck.
Analysts at Natixis said a lasting conflict in Iran could add as much as 15 per cent to the gold price, with much of that likely to be felt in the first few weeks.
The inflationary implications of higher energy prices — European gas prices jumped more than 30 per cent — have prompted traders to reduce their expectations of interest rate cuts, sending global bond yields higher.
For the UK, two quarter-point rate cuts by the Bank of England are no longer fully priced in by the end of this year, according to swaps contracts, which now imply a roughly 60 per cent chance of a second cut. Two-year gilt yields, which are sensitive to interest rate expectations, were up 0.11 percentage points to 3.64 per cent.
In the Eurozone, the chance of another quarter-point cut coming this year fell to about 15 per cent, down from roughly 55 per cent last week.
The overriding concern of big investors is how long higher oil and gas prices could last, including the extent of disruption in the Strait of Hormuz, a chokepoint in the Gulf that is critical to the seaborne commodities trade.
“The longer the conflict lasts, the more central banks will have to incorporate these inflationary pressures in their forecasts, putting upward pressure on interest rates,” said Nicolas Trindade, senior portfolio manager at BNP Paribas Asset Management.
Additional reporting by Emma Dunkley in London
Data visualisation by Ray Douglas