Responding to Recession Fears with Gold?…Securities Industry Says "Not Yet"

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[Asia Economy Reporter Lee Myunghwan] Amid fears of an economic recession and a period of rising interest rates, investor interest in gold investment has recently increased. However, securities firms advised caution in gold investment for now.

On the 26th, Asia Economy examined the price trends of three gold futures index-tracking exchange-traded funds (ETFs) listed on the domestic stock market, finding that these products were trading at prices nearly 10% lower compared to their peak in early March.

The spot price of gold also showed some stagnation. On the most recent trading day, the 24th, the price of gold per 1kg in the KRX Gold Market of the Korea Exchange closed at 76,270 KRW. This is somewhat lower compared to early March and mid-April when prices rose to the 78,000 KRW range due to the Russia-Ukraine war and unstable stock market conditions. The gold price increase has somewhat eased amid the full-scale interest rate hike period, including the U.S. Federal Reserve's (Fed) 'Giant Step' (a 0.75 percentage point rate hike at once).

The market expects that the possibility of further declines in gold prices is not high. Shim Soobin, a researcher at Kiwoom Securities, analyzed, "Typically, gold prices face downward pressure during periods of rising interest rates, but despite the Fed's rate hikes, factors such as inflation and economic concerns continue to support prices, mitigating the downward pressure."

Securities firms also advise caution in gold investment. This is because price volatility is expected until the Fed-led monetary tightening concludes. Hwang Byungjin, a researcher at NH Investment & Securities, said, "Under the Fed's strong tightening to curb inflation, the rise in real interest rates remains effective, making frequent short-term downward price volatility inevitable," adding, "A neutral strategy on gold investment should be maintained until the normalization of monetary policy is completed."

Attention should also be paid to the potential divergence between the prices of gold futures index-tracking ETFs and spot gold prices. This is due to 'rollover,' which refers to the cost of selling the near-month futures at expiration and reinvesting in the next near-month contract. The rollover cost can cause differences between futures prices and spot gold prices during the reinvestment process.