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Hide & Seek: investor risk appetite split on gold versus peripheral debt

Hide & Seek: investor risk appetite split on gold versus peripheral debt

The surprise Brexit referendum outcome has split investors into two camps: those rushing to safe haven assets and those out buying.

Gold has been topping the shopping list for many security seekers in the wake of the result while yield chasers flocked to peripheral sovereign debt.

Investment professionals have revealed to Citywire Switzerland how they think the buying sprees are affecting the sectors.

Gold is glowing

At a two-year high, the price of gold has rallied above $1,350 a troy ounce since the Brexit results as the sterling dropped against the dollar to the lowest levels we’ve seen in 30 years.

Commenting on the race to gold, Florian Siegfried head of the Precious Metals Portfolio Management at AgaNola Ltd said: ‘It’s the reflection of the distrust of governments.'

‘Gold is considered a hedge against governments and politics and this is the reaction you see.’

The weakening currency coupled with the rising price of gold makes the precious metal a first choice for investors looking to protect their portfolio against negative real interest rates.

He added: ‘I wouldn’t rule out the price reaching $1400 by the end of the year, I think that could be on the cards.’

On his allocation for the Precious Capital Global Mining and Metals fund, Siegfried said: ‘Geographically, we are still looking at Canada, Australia, West Africa where there’s ongoing M&A activity.

‘But it’s now time to switch a little to the areas which are under the radar, which were not on investors’ priority list.’

The thriving business for bullion dealers who sell gold coins and bars to retail investors is a sign of ‘distrust of the paper money system’, according to the gold expert.

‘It is a political dimension that I see as being positive for gold. This isn’t going away in a few weeks but is a trend that will continue over time.’

Siegfried added: ‘So gold will do well as a political hedge so to speak.’

Bullish for bargains in peripheral sovereign bonds

Meanwhile, yields on sovereign debt are soaring as Greek 10-year bond yields are reaching new heights, alongside Italian 10-year bond yields which jumped by 30 basis points by Friday and in Portugal where they were trading 40 basis points higher.

Leading up to the vote, the belief that the Remain campaign would come out on top saw spreads between the core and peripherals shrink.

This weekend’s Spanish general election result sent bonds spinning once more.

Commenting on the bond market movements, Marie Owens Thomsen Chief Economist at Indosuez Wealth Management said: ‘Now we’ve had a reasonably positive vote in Spain which again is encouraging the spreads to narrow.'

According to the investment professional, central banks are moving in unison and the option of slashing rates further into negative territory is not off the table.

She said: ‘So all of those potential moves are of course going to underpin the bond market in a positive way.

‘And then what happens is that yields fall and as they fall people will be chasing yield in other places so there is a general global argument for yield convergence and spread compression, which arguably should benefit the peripherals in Europe but also emerging market debt.

She added: ‘Our basic stance is that we expect looser monetary policies after this UK result than we did before so we have changed our call for instance on the Fed.

‘Now, we think they will certainly not raise rates in July and possibly not at any time this year so that puts a different spin on something that was nevertheless going to be a challenge for bond markets.'

Prior to the results, Indosuez were cautioning investors specifically on the short end of the yield curves because they were anticipating the Fed to raise rates, revealed Owens Thomsen.

‘So now we don’t have the same fear of vulnerability in the short end that we had before and this will be a positive for emerging market debt where yields are a bit higher.'

‘If the Fed doesn’t raise their interest rates that will be positive for spread compression in emerging markets as well,’ she said.

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