Gold has been surging on the back of fears of rising tensions between the US and Iran. The metal just hit $1,600 per ounce, its highest level in almost seven years. However, what is going to drive gold once all of this fear calms down? Gold has been known to spike in times of fear, but the positive effect on its price usually fades quickly. What will really drive gold is the same thing that always does: Treasury yields and their outlook. Ever since the Crisis, the relationship between gold and Treasury yields has been pretty strong. When yields rise, gold falls.
FINSUM: We don’t see a lot of upward pressure on rates right now, which taken on its own might make one think gold has a solid path ahead of it.
There have been two huge beneficiaries of the increased tensions with Iran in recent days: oil and gold. The shiny metal is now at its highest level since 2013 at almost $1,600 per ounce. The difference between the two is that gold seems likelier to stay elevated. Goldman Sachs argues oil would actually need a physical disruption to supply in order to stay elevated, while historically gold is likely to keep rising. According to the bank, “In contrast, history shows that under most outcomes gold will probably rally to well beyond current levels”, says Goldman’s head of commodities research.
FINSUM: Gold certainly has a longer runway than oil for staying high as its rise in prices has nothing to do with a possible supply disruption, which means one doesn’t need to materialize in order for prices to keep moving higher.
Gold has been doing well this year alongside all the market turmoil and uncertainty. While one could construe recent progress on a trade deal with China as potentially bad for gold—given its status as an uncertainty hedge—the reality is that rates are headed lower via Fed cuts. This means the Dollar will weaken, and in turn help gold. Societe Generale, for instance, is advising a maximum allocation to gold, saying investors should have 5% of their portfolios in it. Additionally, a resolution to the trade war would probably also weaken the Dollar as there would be less desire to take advantage of its safe haven status.
FINSUM: Basically Soc Gen is arguing that gold will benefit from both lower rates and a risk-on trade. The former aspect seems sound, but gold benefitting from less anxiety? Sounds a weak supposition to us.
One of the biggest banks on Wall Street has just made a bold call on gold. Citi says that the precious metal is likely to shoot to $2,000 or more within the next 24 months. The bank argues that a dovish cutting cycle by the Fed will be a catalyst for price gains, which will be supported by a weakening economy and worries over the trade war. According to Citi, “We expect spot gold prices to trade stronger for longer . . . posting new cyclical highs at some point in the next year or two”. Standard Chartered, another big bank, also made the interesting comment that “It does seem that gold’s status within the portfolio has been reignited”.
FINSUM: The most interesting comment here is about gold’s role in a portfolio. For many years it seemed that investors had forgotten about gold’s role in diversification, but it finally seems to have made a comeback.
A big bank has just come out very bullish on gold. BNP Paribas says gold is going to shoot to over $1,600 per ounce in the medium-term as the Fed embarks on four 25 bp interest rate cuts between now and June 2020. According to BNP Paribas, as headline yields fall with each cut “real rates will move and stay in negative territory, raising the appeal of holding gold”. The ongoing, and seemingly endless trade war, will also be bullish to gold.
FINSUM: This argument makes perfect sense to us, though it is highly contingent upon the Fed cutting and the trade war continuing. In our view, both of these are likely, so this appears like a good buy.