Gold set to shine as Washington stumbles

Bet on gold’s diversifying properties rather than political stability

World’s largest asset manager believes Trump and political drama in the U.S. means gold likely to rise

Real rates flattening out and rising political instability Blackrock’s Koesterich

For now my bias would be to stick with gold Blackrock

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Investors will again turn to gold in coming political strife

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For now I would prefer to bet on gold’s diversifying properties rather than political stability Russ Koesterich, Blackrock.

Not for the first time this year, Blackrock’s Koesterich has spoken about his faith in gold during times of both financial and political instability.

Those times are now, the world’s largest money manager believes. Since the beginning of the year Koestrich has been adding to the gold position of the $39bn Global Allocation Fund. Gold is now the fund’s second-largest position.

Gold’s performance, up 12% year-to-date, is particularly interesting. A hard-to-define asset, gold is often thought to perform best when either inflation and/or volatility is rising. This year has been notable for bothfalling inflationandrecord low volatility, raising the question: What is powering gold’s ascent and can it continue? Two trends stand out:

Real rates have flattened out

Political uncertainty has risen

Real rates plateauing and boosting gold

Gold is most correlated with real interest rates (in other words, the interest rate after inflation), not nominal rates or inflation. While real rates rose sharply during the back half of 2016, the trend came to an abrupt halt in early 2017. U.S.10-year real rates ended July exactly where they began the year, at 0.47%. Theplateauing in real yieldshas taken pressure off of gold, which struggled in the post-election euphoria.

Heightened political uncertainty

Koesterich said earlier this month that

There has been a Pavlovian response by investors to disregard any piece of bad news or any spike in volatility, and that has been a very profitable strategy but we do think that there are risks in the world that are not being priced in.

Currently there is heightened geopolitical risk across the world, with a focus on how the US will manage. Investors will no doubt be looking to reduce their risk exposure as events unfold between the US and North Korea as well as Venezuela’s chaos which shows no sign of dissipating.

The VIX index is often referred to as the ‘Fear Index’. Many believe this is a misnomer and does not portray what is really going on. The indexhas been trading at historically low levels. Apparently investors continue to bet that the index will remain low ifmoney keeps pouring into markets and the global economy carries on improving.

Koesterich doesn’t think this will be the case. For him political risk has not yet been reflected in the markets.

Although market volatility has remained muted, albeit less so the past week, policy uncertainty has risen post-election (see the accompanying chart, above). This is im