Inflation, rising rates, and the Russia-Ukraine conflict have pushed gold prices above $2000/oz. But it has been difficult for gold to stay above this important level. Kim Parlee speaks with Bart Melek, Global Head of Commodity Strategy, TD Securities, about the outlook for gold.
Here to give us his thoughts on that, Bart Melek, Head of Commodity Strategy at TD Securities. Bart, nice to see you. Let me start with just the recent jump in gold prices. You believe a lot of it has to do with investors figuring out whether the Fed has fallen behind the curve. Maybe just explain that out-- what that phrase means to people.
- Sure. Well, it's very nice to be here. Behind the curve essentially means that the Federal Reserve has allowed real interest rates to be too low for too long-- in essence, the market thinks that inflation may be quite elevated for longer and at a higher level than I think the 2% target.
So behind the curve means pretty much exactly that. They were late to the party of tightening monetary policy. And it looks like now they might be trying to play a bit of catch up.
- OK, so with that, then, what is your prognostication on gold if that is, in fact, the case?
- Well, we think certainly for the first quarter, it performed very well. We've seen a high of over $2,000-- $2,070, I believe. I think the next three months should be pretty decent as well. In fact, our average price is somewhat higher than for Q1.
And then the main reason here is in spite of the fact that we're talking about the Federal Reserve, or the Federal Reserve itself is giving us it in the form of the dots, the idea that they're going to hike six more times this year, another four next year-- but even if they go through with most of what they've said, given the inflation rate in the United States [INAUDIBLE] right now and 61% of all components in the US CPI out of the 200-- 61% are above 5% year-on-year, it seems to me that whatever they do over the next few months isn't going to be enough to bring those real interest rates to prevent inflation from really manifesting in a material way. So for that, basically, gold does well because I certainly don't believe that the Fed is going to be aggressive enough to bring inflation and real rates lower to upset gold.
- What kind of range are you looking at?
- Well, I think we can certainly test highs that we've seen a few weeks ago. I think over $2,000 is quite possible. There are going to be several economic headwinds over the next three to six to nine months in the form of sky-high energy prices, food prices. And, in essence, this already is destroying demand on the energy side.
We suspect there's going to be a significant impairment of people's ability to spend. And the Fed is going to be cautious in how they approach or how restrictive they get with monetary policy. So I think for a while longer, it may very well seem to many gold traders as the Fed continuing to be behind the curve, giving them the comfort to continue to be positioned in gold as a hedge against inflation and potential fallout in risk markets broadly.
- The one thing I know about a lot of people who've been, of course, long gold and stalwarts in gold have been disappointed in gold's performance in that we haven't seen the flight to safety, perhaps, that we would have seen in the past. Do you think any of that is going to change?
- Well, I think when you look at it, gold has actually done very well. When you look at equity markets broadly, we're still down, I think, 4.5%, 5%. And gold is certainly significantly above where it was at the beginning of the year. And it doesn't look like any adjustments downwards will be material.
Now, when we look forward, if the Fed, in fact, does get a bit more restrictive, equity markets and other risk markets are at risk. And I think for the time being, gold looks like it will outperform other markets. So I'm not so sure we can say that gold hasn't performed well.
I think it may not have performed as some would have hoped. But I still think it has beat out many, many other asset groups-- certainly the traditional hedge of fixed income, no comparison there.
- Yeah. No, that's a fair point-- a very, very good one on the fixed income. Bart, we're going to have to leave it there. It's always a pleasure. Thanks for joining us.
- It was my pleasure. Thank you.