Mohamed El-Erian Discusses Gold As A Safe Haven

At a Glance

  • Central banks, cryptocurrencies influencing gold, says Allianz Adviser
  • Gold futures volume is at record levels

Rising and falling geopolitical tensions have provided support for higher gold prices throughout much of 2017. During the latest North Korea tension, the price again bounced above $1,300, moving COMEX gold futures up one percent for the day. Overall, gold futures prices are up more than 10 percent on the year.

Interest in gold is, in fact, at all-time highs. COMEX gold futures traded a record 366,000 contracts in September, up 88 percent from the same time in 2016. However, some of gold’s traditional relationships to other assets have changed this year. Interest in equity indexes remains strong, with the S&P 500 up 14 percent for the year, and U.S. 10-year bond yields have remained relatively flat. Traditionally, both have an inverse relationship to gold.

Mohamed El-Erian, Chief Economic Adviser at Allianz and one of the most respected voices in financial markets, spoke at the CME Group Precious Metals Dinner in September. While there, we sat down with him to discuss gold trends and whether gold’s status as a safe haven has changed. He says there are two key factors influencing gold at present.

Central Banks

“Because central banks have repressed volatility, people feel there’s less need for a safe haven,” El-Erian says. “Central banks have done this through asset purchasing programs like quantitative easing by the U.S. Federal Reserve.  I think that’s going to go away over time. Central banks cannot stay in the business of repressing financial volatility forever.”

In fact, the Federal Reserve announced following its September meeting that they will begin reducing their balance sheet. However, there is a more permanent factor that may limit gold’s safe haven status, says El-Erian.

Cryptocurrencies

Bitcoin and other cryptocurrencies have “taken some of the dedicated interest in gold away from gold. I think that’s a longer term influence,” says El-Erian. He believes the current surge in crypto trading is a bubble, but that traders in bitcoin or other digital currencies often see them as a safe haven when geopolitical or economic tensions rise.

El-Erian also commented on a few other gold market factors in our interview:

On central banks’ influence on commodities: “Commodities are further down the chain, so they’re not influenced as much as other asset classes have been.”

On gold’s relationship to the 10-year bond: “When central banks buy an asset, markets tend to front-run that. And therefore interest rates have been incredibly low, incredibly stable, despite all sorts of things happening.”

Despite central bank policies around the globe repressing volatility in the short term, El-Erian believes that over time, “gold will return as a safe haven, as a hedging instrument.” Watch our conversation in the video above for his complete comments.

Evan Peterson is director of corporate marketing at CME Group and managing editor of OpenMarkets.

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