Schroders turns bullish on gold as debt, inflation and currency risks outweigh elevated real yields

The London-based asset manager said it sees an increasingly attractive medium-term opportunity despite elevated real yields and gold’s recent rally.

In its latest multi-asset outlook, Schroders upgraded gold to positive, highlighting a combination of strong structural demand, improved speculative positioning and persistent concerns surrounding inflation, sovereign debt and currency stability.

“A combination of elevated real yields, renewed institutional demand, and cleaner positioning among fast-money investors has prompted us to re-engage with the gold trade; despite the recent rally, we believe that this position may offer an attractive medium-term risk/reward opportunity,” the asset manager said.

The firm’s bullish positioning in gold came as the yellow metal was seeing renewed momentum due to growing fears over unsustainable growth in U.S. debt, prompting a renewed debasement trade in the U.S. dollar. Last month, gold prices tested resistance just below $4,700 an ounce.

Gold prices have dropped sharply from their recent highs after Federal Reserve Chair Kevin Warsh reiterated his focus on price stability and bringing inflation down to the central bank’s 2% target. Despite some selling pressure, gold prices remain well above the July lows. Spot gold last traded at $4,381.50 an ounce, up more than 1% on the day.

Schroders’ bullish stance on gold is also notable, as its analysts remain broadly constructive on the global economy and risk assets. The firm continues to favor equities, supported by resilient global growth and robust corporate earnings, while maintaining a pro-cyclical investment stance.

At the same time, Schroders said higher real yields have improved the valuation of U.S. government bonds. Traditionally, rising real yields increase gold’s opportunity costs because the precious metal offers no yield. However, Schroders’ decision to re-enter the market suggests that other fundamental factors are becoming strong enough to offset this traditional headwind.

The firm specifically highlighted renewed institutional demand and cleaner positioning among speculative investors as catalysts behind its renewed interest in the precious metal.

The analysts also noted that the precious metal is “supported by strong structural demand from central banks and China, alongside persistent concerns over inflation, sovereign debt and currency stability.”

Schroders said it remains mindful of risks to monetary-policy independence in an environment characterized by large fiscal deficits, although it continues to have confidence that central banks will maintain an appropriate policy course.

The asset manager also expects resilient U.S. growth to keep the Federal Reserve in a tightening posture. Schroders noted that markets are pricing in only a modest amount of additional tightening, leaving room for further rate hikes if its constructive economic scenario unfolds.

The firm has also re-established long positions in the U.S. dollar against lower-yielding currencies, including the Japanese yen and Swiss franc.

That combination creates what would traditionally be a difficult environment for gold: elevated real yields, the prospect of higher U.S. interest rates and a stronger U.S. dollar. Yet Schroders is nevertheless increasing its exposure to the precious metal.

The divergence suggests the firm sees gold’s structural investment case becoming increasingly independent of traditional short-term macroeconomic relationships.

Central-bank demand has been one of the most important pillars supporting gold in recent years, as reserve managers diversify their holdings. Schroders also highlighted demand from China as another structural source of support.

Meanwhile, concerns surrounding sovereign debt and currency stability continue to strengthen gold’s role as a monetary asset and portfolio diversifier. Those risks could become increasingly important if large fiscal deficits eventually undermine investor confidence in government debt or monetary-policy independence.

Schroders’ bullish gold outlook also fits within its broader positive view on commodities. Along with gold, the asset manager remains constructive on energy and industrial metals and maintains exposure to natural resources through global mining companies and energy producers.

Although Schroders remains optimistic about global growth, it identified accelerating inflation and a meaningful deterioration in economic activity as two major risks to its outlook. Both scenarios could ultimately reinforce gold’s diversification appeal.

For now, however, the key message from Schroders is that investors do not necessarily need falling interest rates or declining real yields to justify owning gold. Even after the precious metal’s recent rally, strong structural demand and mounting concerns over debt, inflation and currency stability have created what the firm sees as an attractive medium-term risk/reward opportunity.

See live precious metals prices for gold, silver, platinum and palladium — in USD, CAD and 12 more currencies.