Transcription
Hello everyone, this is Tsukamoto from Pictet Japan. Today, we will be delivering the Pictet Gold Monthly Update with the theme "Conditions for Gold's Role in Times of Crisis, and When Gold Prices Will Rise Again."
As of Friday, March 20th, gold prices have been affected by the crisis in Iran and the resulting Strait of Hormuz crisis. Despite being in the midst of such a crisis, gold has fallen for eight consecutive business days. Looking at the weekly pace, this marks the seventh-largest decline since 1971. While this may seem contradictory at first glance, it is not. From this phenomenon, we will try to deduce the conditions for future gold price increases.
First, as you can see, it is March 2nd. What I would like you to pay attention to first is the previous movement. Here, in response to rising geopolitical risks, gold prices actually rose temporarily. The background to this was February 28th. The United States and Israel attacked Iran, and the situation changed dramatically. A major incident occurred: Iran's Supreme Leader Khamenei was killed. Furthermore, Iran blockaded the Strait of Hormuz, effectively blocking navigation through the Strait of Hormuz. This happened against a backdrop of soaring crude oil prices.
As a result of these events, on March 2nd, gold prices rose. However, on March 3rd, Brent crude oil futures for the nearest contract saw a sharp rise, exceeding $85 per barrel. This led to rising inflation concerns, a retreat in easing expectations, meaning a reduction in interest rate cut expectations, which in turn led to rising interest rates and a surge in the US dollar. Brent crude oil prices continued to rise thereafter, temporarily exceeding $113 per barrel on March 19th, spreading concerns. In response, the yield on US 2-year Treasury notes, which are sensitive to policy rate outlooks, also rose almost steadily. As of February 27th, the yield on 2-year Treasury notes was 3.37%, but by March 20th, it had risen significantly to 3.9%. As I will explain later, interest rates surged. In response, the yield on US 10-year Treasury notes also rose. And in response to this rise in interest rates, the US dollar index also rose. From 97.6 on February 27th, it rose significantly to 100.4 by March 13th. Furthermore, the S&P 500 stock price index has fallen by more than 5% from February 27th to the present. To compensate for these losses, gold has risen the most since last year. As one of the assets that has risen the most, selling for cash has accumulated. Gold prices have continued to decline.
Therefore, let's organize the main characteristics and price fluctuation factors to understand why gold did not function as a safe-haven asset this time. Gold has four main characteristics. First, since there is no interest or dividend, rising interest rates are negative. Falling interest rates have a positive impact. On the other hand, rising interest rates tend to have a negative impact.
Next, let's talk about fluctuations in the value of the US dollar. A weaker dollar is positive, and a stronger dollar is negative. It tends to have a negative impact. Furthermore, when inflation progresses, the inflation rate is positive, but when it falls, it becomes negative, and it is then seen as a safe-haven asset. As a safe-haven asset, geopolitical risks expanded, and demand increased. When the positive shrinks, it tends to become negative, but this time it was special. This time, geopolitical risks indeed increased. In that regard, there were positive factors, and inflation also had an impact. The inflation rate also rose, didn't it? This also certainly became a positive factor, but rising interest rates became a drag. As inflation rose, expectations for interest rate cuts receded, and interest rates rose. Interest rates rose, and because interest rates rose, the dollar strengthened. A stronger US dollar became a headwind. In essence, positive and negative factors were in a tug-of-war. Amidst this, there was also selling for cash. Gold, which had risen significantly since last year, became a target for selling for cash. It is believed to be a target for selling for cash to cover losses from the decline in other assets.
What should be considered here is generally a phase of economic slowdown. In crisis situations that cause a slowdown, bonds are bought. It is also expected that economic growth rates will decline. In such times, bonds are bought due to demand for safe assets, meaning interest rates fall. Interest rates fall, meaning interest rates fall. Furthermore, as economic growth slows, concerns about the economy spread. As interest rates also fall, this becomes a factor for a weaker dollar. A weaker dollar is often observed, but this time the movement was the opposite. This time, attention is focused on the opposite movement. It is said that the background to this was precisely the surge in crude oil prices. This is a characteristic of this time. It is believed that one of the major characteristics of this geopolitical risk had a background.
Let's look specifically at how much higher oil prices led to higher interest rates. First, rising oil prices led to inflation concerns and a retreat in expectations for interest rate cuts. As a result, interest rates rose. Interest rates rose, and the dollar also strengthened. This negatively impacted gold prices. Looking at Friday, February 27th, the yield on US 10-year Treasury notes was 3.9%. It had fallen to 3.9%. From here, Brent crude oil futures rose sharply. In line with this, concerns about inflation. Precisely due to inflation concerns and a retreat in expectations for interest rate cuts, interest rates surged. Due to the retreat in expectations, interest rates surged to 4.3%. You can see that it rose to 4.3%. After that, it further reached 4.38% on March 20th. This interest rate will rise to 4.38%. It will continue to rise. Thus, for money that does not generate interest, a prolonged trend of rising interest rates became a significant negative factor.
And this rise in interest rates also led to a rise in the US dollar index. The blue line shows the yield on US 10-year Treasury notes, the same as before. You can see that the US dollar index has also risen significantly along with this rise in interest rates. For this reason, some newspapers suggested a "buy the dollar in times of crisis" narrative, but regarding this dollar index, although the yield on 10-year Treasury notes continued to rise, this was the peak, with 100.4 being the high. After that, despite rising interest rates, the US dollar index actually began to decline. Therefore, it is possible that it is not necessarily a "buy the dollar in times of crisis." In fact, on March 20th, this dollar index fell to 99.6.
Considering this, the reason why gold did not act as a safe haven is that while the rise in geopolitical risks was certainly positive for gold, the rise in inflation concerns due to historically high oil prices had an impact. A significant rise in US interest rates is one reason. Normally, when a risk event occurs, bonds are bought as safe assets, and interest rates tend to fall. However, this time, due to the impact of higher oil prices, bonds were sold due to inflation concerns, and interest rates rose. Furthermore, this rise in interest rates led to a rise in the US dollar index, which became a negative factor for gold. However, as introduced earlier, this US dollar index already appears to have peaked slightly.
So, what scenarios can be considered as factors for future gold price increases? In fact, the opposite will happen. That is, if US interest rates fall and the dollar index declines, this is considered a major positive factor for gold. So, under what circumstances will interest rates start to fall? For example, if AI advancements lead to a decrease in US employment and the employment situation deteriorates. As recently reported, concerning private credit, meaning loans to companies not through banks, and private equity, problems related to investment in unlisted stocks may become more serious.
Next, regarding the case of a weaker US dollar, although the US dollar has gradually started to weaken since March 13th, if it further progresses, one possibility is that a situation where US fiscal deterioration is again taken into account is conceivable. A huge budget is already being planned for military operations in Iran. US gasoline prices are about to exceed $4 per gallon. This $4 is said to be a very important line. In that case, measures against rising gasoline prices may even lead to large-scale fiscal spending in preparation for the midterm elections. Also, as seen earlier, interest rates have been rising, and concerns about further increases in interest payments, which already exceed $1 trillion, may spread. These situations may overlap, leading to renewed concerns about the sustainability of US finances, which could lead to the possibility of further weakening of the US dollar. In that case, the situation that spread since last year will occur again. Investment in gold may resume to hedge the currency value of the US dollar, and of particular note is the demand for gold from central banks worldwide. The reason for this is the gold purchases by central banks, which have generated gold demand of 800 to 1000 tons over the past four years. When gold prices fall, the tonnage that can be purchased with the same amount of money increases.
Once again, this structural demand for gold, namely demand from central banks and demand for hedging against currency debasement, has the potential to significantly support gold prices in the future and may become a driving force for pushing up gold prices in the long term.
Now, let's look at how the current crude oil and gold markets reflect future prices. Let's take a look. This is the Brent crude oil futures curve. That is, it plots the prices for each delivery date. So, for May 2027 delivery, this is the price. For May 2028 delivery, it is like this. This curve connects the prices set in the futures market for various delivery dates. Looking at the changes, before the invasion of Iran, it was like this, but while it has risen significantly, especially for near-term contracts, it has rapidly fallen for three and six months ahead. This suggests that this shock may resolve within about six months. If the situation moves towards resolution and crude oil prices decline, inflation concerns will also subside. This could be a positive scenario for gold prices.
What about gold? Similarly, if you look at how only the near-term prices have sharply risen, it looks like this. The gold futures curve, created in the same way, is as you can see. It is upward sloping, meaning the market expects such a movement in gold in the medium to long term. This indicates that there is no change in the structure of this period.
Today's summary. The background to the current adjustment in gold prices is the significant rise in crude oil prices due to the worsening situation in the Middle East, which led to increased inflation concerns. This, in turn, led to rising interest rates and a rise in the US dollar index, which has been a major negative factor for gold prices. On the other hand, there are also positive factors such as rising geopolitical risks and inflation, so it is a tug-of-war situation. One of the reasons for the decline in many assets this time is that it led to selling of gold in the form of combined selling.
On the other hand, the reason why gold, as a safe-haven asset, is expected to shine again is that war always places a significant burden on national finances. Due to the impact of soaring crude oil prices, gasoline prices, which affect approval ratings in the United States, have risen significantly, so the possibility of economic measures being taken cannot be ruled out. Furthermore, rising interest rates will lead to increased interest payments in the United States, so concerns about the credibility of the US dollar and existing themes may be re-examined in the market. And even if that does not happen immediately, purchases by central banks are expected to continue this year. The decline in gold prices itself is expected to increase the tonnage of gold purchases.
In this way, the highly uncertain situation in Iran, and the increased uncertainty that may result from it, has benefited from rising crude oil prices. Considering Russia, the conflict in Ukraine is likely to be prolonged. In such a situation of continued uncertainty, gold prices are likely to continue to fluctuate significantly. As the situation resolves, two structural tailwinds, central bank purchases and debasement trades, will promote gold purchases. We believe that the timing to push up gold prices again will come at some point. Now may be the time to return to the basics of asset management and consider time diversification and asset diversification.
From here, we would like to show you the factors behind the change in the net asset value of Pictet Gold in February. First, let me explain Pictet Gold. This fund effectively invests in gold and offers two courses: with currency hedge and without currency hedge. It also settles once a year. Please note that as investment trusts invest in securities with fluctuating prices, the net asset value fluctuates. Please also be aware that the principal investment is not guaranteed.
Now, let me explain the factors behind the change in the net asset value of Pictet Gold (with currency hedge) in February. The net asset value on February 27th was 23,101 yen. This was a decrease of 1,126 yen, or 4.65%, compared to the end of the previous month. The main factors for the change in net asset value were 1,052 yen from gold and 65 yen from currency hedging costs, etc.
Next, regarding the factors behind the change in the net asset value of Pictet Gold (without currency hedge) in February 2026, the net asset value on February 27th was 46,325 yen. This was a decrease of 1,231 yen, or 2.59%, compared to the end of the previous month. The main factors for the change were a decrease of 2,031 yen from gold and an increase of 818 yen from currency.
We would like to show you the detailed trends of gold prices and the US dollar-yen exchange rate in February 2026. On the left side, we first show the trend of gold prices. Gold prices on a US dollar basis fell by 4.4% compared to the end of the previous month, and by 2.8% in yen terms. Looking at this movement, at the beginning of the month, the market was extremely overheated, and long positions in futures were accumulating. The CME (Chicago Mercantile Exchange) changed its margin system for metal futures, leading to a significant increase in margin rates in the short term. Also, as the possibility of former board member Warsh being nominated as the next FRB chairman emerged, profit-taking movements spread. However, thereafter, uncertainty regarding tariff policy increased. Concerns about the worsening situation in Iran led to a significant rise in gold prices, but overall, it ended up being negative for the month.
On the right side, regarding the dollar-yen foreign exchange market, with the view that the ruling party was dominant in the general election, concerns about Japan's expansionary fiscal policy strengthened, leading to a weaker yen and a stronger dollar in the early part of the month. Subsequently, due to the slowdown in the US labor market, expectations for additional interest rate cuts in the US strengthened. Against the backdrop of concerns about foreign exchange intervention by the Japanese Ministry of Finance, the yen strengthened and the dollar weakened. However, in the latter half of the month, there were reports that Prime Minister Takahashi showed reluctance towards an additional interest rate hike by the Bank of Japan. Following the government's selection of candidates who prioritize monetary easing by the Bank of Japan and aggressive fiscal policy, the trend of a weaker yen and a stronger dollar strengthened again, and the yen weakened and the dollar strengthened throughout the month.
Regarding the outlook for the current situation in Iran, it is currently fluid and highly uncertain, so profit-taking movements may strengthen depending on the situation. Price fluctuations may become significant. However, even in such cases, amidst the increasing uncertainty in the global economy and financial markets, the direction of long-term demand for gold as a store of value is unlikely to change. Furthermore, gold inherently has a low correlation with traditional assets such as stocks and bonds and tends to move differently, so we believe that gold will continue to play an important role as an asset for asset preservation and long-term diversification. In such uncertain times, it is important to return to the basics of asset management and consider "long-term diversification."
Thank you for watching until the end today.