Feb 19 (Reuters) - Since October 2022 gold has far surpassed the dollar as an investment but there is a growing risk that overcrowded positioning results in a swift adjustment that fuels a surge in demand for the global reserve currency with volatility soaring throughout FX markets.

In 2022 investment in the dollar became overcrowded leading to a correction that led to a marked change in sentiment but not a change in direction.

The dollar has recouped all of its losses to rise to a multi-year peak in January while gold has almost doubled in value.

This marked outperformance is creating a problem. The precious metal, which is far less safe and much less liquid than the dollar, seems to be the preferred safe haven in which investors are sheltering at the start of a trade war.

Because the United States is at the centre of the spat, gold's preferred status may seem logical, but by shunning the dollar to buy a less liquid, and potentially overcrowded asset, investors are gambling. To speculate in time of great uncertainty may prove costly.

Should the dispute intensify with tariffs following delays, a truly risk-averse situation that negatively impacts stocks may evolve.

Should that occur then those sheltering in gold may discover it is far less safe than they presume it to be, while the dollar that has been shunned once again shines in a crisis, irrespective of the role of the U.S.

This will only change if the dollar loses its reserve status, or the U.S. abandons its strong dollar policy. Right now both are remote possibilities.
Both rising but Gold far outstripping USD since Oct 2022

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)