BlackRock Experts See Long-Term Argument for Gold Amidst Short-Term Pressures

Gold prices have declined significantly this year, plummeting by about 25% from their record high in January and down around 7% since the beginning of the year, according to Russ Koesterich, Portfolio Manager of BlackRock's Global Asset Allocation division.

This downturn can be attributed to several factors, including the sharp reversal of price momentum, which has led to a correction in the gold market. According to Koesterich, instead of providing protection when the market goes down, gold at times increases portfolio risk.

Another significant factor is the strong recovery of the USD, with the Dollar Index (DXY) rising by over 6% compared to its low in January. This uptick in the greenback has put pressure on gold prices, as it makes holding costs more expensive for buyers using other currencies.

The change in interest rate environment also poses a significant obstacle for gold, with real yields in the US increasing significantly. Koesterich noted that the 10-year real-term yield, determined from the US anti-inflation Treasury bond market (TIPS), has risen from around 1.65% in early March to 2.20%. This increase in real yields has resulted in a higher opportunity cost for holding an asset like gold, which does not generate cash flow.

Cash flow is increasingly being drawn towards the AI stock group, with investors prioritizing profits and growth prospects. In this environment, gold, an asset that does not generate corporate profits, is being somewhat overshadowed.

Despite these challenges, BlackRock still sees reason to maintain a moderate gold position in investment portfolios. Koesterich believes that debt and budget deficits remain at historical highs, while the risk of currency devaluation remains a long-term concern. The geopolitical environment has not yet become more stable, supporting the role of gold in diversified portfolios.