GLDM - Can The Gold Rally Last?
2023-04-20 21:45:00 ET
Summary
- Can gold's rally last?
- Gold is losing steam as doubts grow about a pause in rates.
- Why gold investors are keeping a close eye on the Fed.
The price of gold has been on a steady climb for several weeks. But those gains could be tempered by expectations the U.S. Fed may continue hiking rates to tackle inflation. Greg Bonnell speaks with Hussein Allidina, Head of Commodities at TD Asset Management, about the outlook for gold.
Transcript
Greg Bonnell: The price of gold has been steadying after a pretty big move higher in recent weeks. But as investors consider the future path of interest rates and the economy, will that trend hold? Joining us now to discuss, Hussein Allidina, Head of Commodities at TD Asset Management. Hussein, great to have you back on the show.
Hussein Allidina: Great to be here.
Greg Bonnell: So that was a pretty big move in the month of March, into early April. Right now, I feel like we're on a pause in a number of asset classes. What was behind that run on gold? And what do we think might be ahead?
Hussein Allidina: So absolutely, a very big move, gold trading pretty close to the highs we went through, 2,000 an ounce, trading just below that right now. I think primarily, Greg, it was weakness in the dollar. A few weeks ago, expectations that inflation had peaked that would allow the Fed to back up from the rate hikes. And I think that lent to some headwinds for the dollar.
If you look at a chart of the dollar and gold, over time, not the best correlation; of late, a really tight correlation. And as the dollar weakened, again, on the expectations that the Fed might pause, we might see the end of rate hikes, I think you saw gold perform quite well.
Gold has actually performed quite well if you look outside of the dollar in other currencies. And I think gold has performed reasonably well, even in the dollar. But your question about what's been driving gold of late has primarily been weakness in the dollar.
Greg Bonnell: Now it feels like we're in a bit of a period right now across a number of asset classes, including gold, where investors are trying to figure out what comes next, and maybe some of their assumptions about where the Fed might be headed are being tested. What does the near term, medium term, even longer term look like for gold?
Hussein Allidina: So we talked before, I think gold has a place in the portfolio. I think from a portfolio construction point of view, gold affords properties that your typical portfolio, equities, fixed income, even commodities don't necessarily provide. It is a safe haven. So I think you want to have an allocation to gold. And I think that supports it medium term.
If you look at what EM central banks, for example, have been doing, they've been diversifying away from the US dollar, away from our other fiat currencies. The EM central banks that hold the largest proportion of gold as a percentage of their reserves tend to exhibit far less volatility in their currency, particularly in periods of distress.
I think that equities have had a phenomenal run. I think if there is downside potentially in equities as we move into an environment where growth is slower, I think that bodes really well for gold. If you look at gold ETF holdings, the number of shares of gold ETFs outstanding, they have moved lower from the highs that we saw at the weakness of the pandemic, lower than they were in March of '22 when inflation was quite elevated.
And I think that, again, if we have any turbulence in the equity market, the appeal, the luster of gold increases. And if ETF holdings increase, that takes physical demand-- that takes supply out of the market. And I think that's constructive for gold as well.
Greg Bonnell: Now, I want to talk a bit about that because over the years, I've always heard people talk about whether-- OK, making gold a part of your portfolio, a lot of the retail investors will play that through an ETF. And then you're talking sort of paper gold versus physical gold. How should investors be thinking about that?
Hussein Allidina: That's a good question. So many ETFs that track gold are physically backed. So Greg goes out, he buys an ETF. In the background, they're taking gold and putting it into the reserve, into the safe for you. That's very different than owning gold equities or owning financial gold.
Ultimately, and I think the gold bugs would not agree with this, but I think that the idea of having physical gold is interesting. But in that very right tail where you need that physical gold, I think we're going to have far larger concerns. Hopefully that right tail is not something that we observe. But if you have a couple of ounces of gold, and I don't-- I think you might be a target in that type of environment.
Greg Bonnell: We're talking pretty extreme societal breakdown, I think.
Hussein Allidina: I think it's important to have-- when I say I think it's important to have gold in your portfolio, I'm talking financial gold. That could be futures. That could be gold-backed. I think you need to have that diversification, again, because the properties afforded by gold are different. The factors that-- factor exposure that you get from gold is very different than what you get from equities.
Gold performs well in periods of duress. Gold performs well when rates are decreasing, when inflation expectations are elevated. And I think one thing is certain. We will likely see increased inflation, volatility moving forward. And I think that bodes well for gold.
Greg Bonnell: When I think too about demands for gold, you're talking about, just really-- I mean, it's Fed policy and then how the US dollar moves off of that that's driving some of the asset classes, including precious metals. But at the same time, you and I have discussed before about actually, if there is that demand for financial gold, but it's backed by real gold-- and then the whole mining sector, really not putting a lot of investment into mining more gold. I mean, what does the supply situation look like for gold?
Hussein Allidina: Yeah, so it's interesting. When we talk about most commodities, I spend a lot of time talking about supply and demand and the fundamentals. We don't do that as much in gold because gold is kind of a currency, kind of a financial asset. But it's a very good question.
And definitely, very similar story in gold that you're seeing in copper and nickel and ali. We haven't-- because gold prices have been reasonably depressed for the last 10, 15 years, there hasn't been that sort of material incentive to invest. Gold has been produced as a byproduct of copper. We haven't been producing as much copper either. So yeah, net-net, the supply side is reasonably challenged.
And the demand side, again, not only financial demand, but if we think about jewelry demand, particularly out of the far east as income per capita there is growing, you're seeing continued increases in gold consumption for jewelry purposes.
Greg Bonnell: I don't expect you to give me a price target. But that aggressive move in the price of gold, well above $2,000 in such a short period of time-- and really, if you go back to-- I think it was about October off of the lows of around the fall, it's been a pretty big move over those last several months. Could there be much more upside in the price of gold?
Hussein Allidina: If you are in the camp that the US dollar is closer to a high than a low, then I think you are also, by default, in the camp that gold prices need to move higher from here. As I said early in the session, if you look at the price of gold in reais terms, in rupee terms, in euro terms, in yen terms, gold has outperformed meaningfully. And I think again, Greg, when we talk about gold, when we talk about oil, we're talking about nominal numbers, $2,000 an ounce. If you adjust that for inflation, I'd argue that it's quite cheap.
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Can The Gold Rally Last?