Schroders Investment: Two main reasons to be bullish on gold prices; current stage may be considered a good buying opportunity

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　　Source: Zhitong Finance Network

　　International gold prices surged briefly at the outset of the Iran war but subsequently plunged repeatedly, only stabilizing and rebounding after the US and Iran agreed to a ceasefire. James Luke, Senior Portfolio Manager (Gold & Commodities) at Schroders, believes that gold has long been regarded as an excellent tool for portfolio diversification, effectively hedging against long-term risks stemming from geopolitical and fiscal pressures. However, extreme spikes in oil prices are likely to impact all asset classes in the short term, including gold. Still, this period could be considered a good buying opportunity.

　　Schroders is bullish on gold for two main reasons. First, the geopolitical environment has shifted from the US-led unipolarity (which peaked in the early 2000s) to a multi-polar competition among major powers. This trend is likely to continue as confidence in globalization and supply chains erodes, unless the US or Israel scores a decisive victory quickly.

　　Secondly, the current situation raises the likelihood of stagflation and increased defense spending burdens. The probability of an economic recession is rising, and the fiscal conditions of G7 nations continue to deteriorate with upward trends in debt and deficits. War is highly likely to become the next fiscal shock, and the probability of worsening fiscal outlooks globally is quite high.

　　James Luke points out that even if the Middle East crisis persists, he expects that after the short-term reflexive sell-off in gold prices ends, gold will start to reverse its recent negative correlation with the oil market.

　　When it comes to gold stocks, their value has fallen by about 25% since the outbreak of the war. James Luke says investors are concerned that cost inflation and falling gold prices will severely erode gold mining companies’ profit margins. The market again displays a reflexive tendency, viewing the Iran shock as a replay of the 2022 Ukraine energy crisis, which ultimately led gold stocks to underperform gold bullion.

　　However, the biggest difference now compared to 2022 lies in the starting point of gold mining companies’ profit margins. On an all-in basis (that is, including total costs such as growth capital and cash taxes), profit margins at the outbreak of this conflict are about ten times higher than at the start of the Ukraine war—about $150 per ounce in early 2022 versus $1,800 per ounce in Q1 2026. Therefore, even if costs increase much faster than gold prices, gold mining companies' profit margins could still expand, making gold stocks very attractive.

Editor: Zhu Henan