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Gold prices recently hit record highs as the precious metal benefited from a surge in demand.Bart Melek, global head of commodity strategy at TD Securities, told MoneyTalk’s Greg Bonnell that while prices are likely to In the short term, he still expects gold prices to go higher next quarter.
transcript
Greg Bonnell – Gold prices have been on a record rise as the market considers the Federal Reserve’s next move and the possibility of a rate cut. But is there still momentum behind the precious metals’ rally? Join us now to discuss Bart Melek, Head of Global Commodity Strategy at TD Securities. Bart, great to have you back on the show.
Bart Literacy – It’s great to be back.
Greg Bonnell – OKSo these are the fun moments when I’m here Gold prices have hit new highs in recent days. I said, good thing we got Bart up. What’s behind this rally? What did we see? Why are we seeing this move?
Bart Literacy – Well, I think it’s starting to – you know, after some bad data a week ago, basically the market concluded that the Fed was more likely to cut rates this year as the economic data softened. We’re still not sure if it will be May, June or later and how much of the cuts will be, but I think the market has basically priced in the cuts.
Therefore, our market is under-allocated to gold. So from our perspective, we’ve seen a lot of short covering. We also saw funds establishing new long positions. This triggers some technical triggers, CTAs. System funds intervened, and the price hit a new high, slightly above 2,200 points. We stayed there for a while. Of course, we got another set of data this morning that reversed some of the momentum.
Greg Bonnell – Of course, let’s talk about the data because obviously, the stock market seems to be ignoring it, but south of the border, inflation is still above 3%, which is hotter than expected, but there seems to be some optimism coming from the United States. Equity parties don’t have to worry, everything will work out in the end. I mean, what’s the dynamic here? Today, it appears to be affecting gold more than any other factor.
Bart Literacy – Well, of course. You know, gold – we have to say, gold trades very much like a zero-coupon 30-year bond with more convexity. It is therefore very sensitive to interest rates, especially real interest rates. When the fed funds forward curve sells off a little, spreads are affected. I think we’ve seen some profit taking today. We may see less interest in holding long positions. I mean, what happened?
Well, our core count is higher than expected. I think the most important core here is the less volatile part of the inflation index. The title is also a bit high. Core is 3.8. Well, that’s certainly a lot higher than the 2 goals. And the core — in fact, core personal consumption expenditures is what the Fed looks like. CPI is very close to this number and is a good indicator.
So what does it tell us? Well, it’s possible that the U.S. central bank isn’t quite ready to cut interest rates just yet. They’ve made it very clear that they expect rates to fall this year, but I think we’re just debating exactly when and how much.
So for now, I think the buying momentum has subsided a bit because of this number. We’re seeing prices that are a little tame. In fact, I posted a note about this impact in our instant analysis on our portal, where I said there was strong support for some point in time around 2025, 2075. I wouldn’t be surprised at all if we were leaning towards that level just because of the uncertainty of when the Fed will track these numbers.
Now, what’s our long-term thinking? I like gold. In fact, I’m changing my forecast for next quarter to 2250, and we do think we’re going to get lower rates eventually. Real interest rates will fall. We’re still seeing pretty strong activity on the physical side.
In fact, it was the physics of the gold supply and demand equation that kept gold prices around 2000, when the Fed was indeed tightening monetary policy more severely than it had been last year – the Fed’s tightening momentum had slowed. But as inflation falls, these real rates become quite tight. Gold does very well, but that’s not usually the case.
Greg Bonnell – Was it bought by the central bank? You emphasized that every time you took the field last year. Central banks are buying gold.
Bart Literacy – In 2022, central banks bought record amounts of gold. 2023 is not far behind. There are indications that central banks will continue to be strong buyers of gold this year. There are many, many reasons.
One of them is, at the end of the day, they’re very concerned that, in fact, no matter who the future president of the United States is, this is going to continue to be sky-high. We’ve seen the current president try to address some of these issues. But ultimately, the U.S. faces large unfunded liabilities, which likely means the deficit will remain large. As far as I’m concerned, America doesn’t have much interest in paying the taxes needed to balance all of these budgets.
On the other hand, we see ongoing geopolitical risks.
Greg Bonnell – I want to ask you this question, right? Because if you’re worried about politics and debt levels in Washington, there’s no shortage of geopolitical things to worry about on Earth.
Bart Literacy – Well, you know, we have the Middle East. Specifically, we have a problem in the Red Sea. But when it comes specifically to gold and central bank buying, the People’s Bank of China remains quite active. We think one of the likely reasons is that they are trying to diversify away from sanctionable fiat currencies. You know, we will never project any violent content against Taiwan. But I think the tensions are there and the risks are there.
You don’t actually have to believe that something is going to happen, but if the odds start to increase, it might be wise for a country like China to have foreign exchange reserves worth about $3.2 trillion and, you know, 3.4, I think, this When the percentage is represented by gold, the United States is about 60 plus 70. And its other geopolitical partners—I would rather say competitors—have more. For them, it might make sense to diversify away from the U.S. dollar and other currencies.
First, if you’re worried about the long-term viability of the dollar, it’s too concentrated. We’re not saying it’s going to collapse or anything, but there’s a risk that over time, if you have these deficits, as the population ages, you may have to start monetizing it in some way. These expenditures will continue to increase relative to tax revenues. There are other realities that suggest trade has shifted from Western-centric flows to more global ones.
So, for all of these reasons, it makes sense for them to diversify their FX holdings. This could mean a lot of gold. I think if China increased its current holdings to 10% of its reserves, I would estimate it would be 2,800 tons. these two components.
If we see strength in physical jewelry from China’s central bank, we will start to see more free traders move into gold as rates come down, and of course the concern is that the Fed will start cutting rates before those. The measure is 2% and that’s what it looks like. The market may be concerned about credibility. Is 2% a real goal, or is that just what the Fed says? For example, if you start cutting interest rates significantly while inflation is still around 3, you may want to hold gold as a hedge.
