Concerns about economic stability have been pushing the price of gold higher. But those same concerns are weighing on oil’s outlook. Kim Parlee speaks with Bart Melek, Global Head of Commodity Strategy at TD Securities, about the trends to watch in the commodities space.
- Great to be here. Thank you.
- OK, gold-- been on a tear and then a rate hike-- an expected, priced-in rate hike happened from the Fed today. What does it mean for gold?
- Well, I think the rate hike normally isn't particularly good news for gold. This time of course, it ended up being really good news mainly because, I think from our perspective, the Federal Reserve has weakened its signaling. So I think they're a little bit less hawkish than they were before this financial crisis unfolded.
The Chairman cited tightening that already is happening due to credit price increases. Essentially, we're seeing more risk in the market, probably less lending by the regional banks. And that means a lot of the tightening that would have happened-- would have been needed from the Federal Reserve-- has already been occurring in the real world, so they may have to do less than they thought.
- Hmm. So what is your outlook for gold? Because again, we just had a chart up and beautiful little move up for those that were long gold since March-- beginning of March, I should say. But what now?
- Well, I think we should never think that uptrends are undisturbed. We could go up and down here. We could easily see another hike from the Fed. We could see inflation break out.
But our scenario is that this is a good environment for gold. I think the risks are to the upside. We've passed $2,000 very recently, we've corrected since then, now we're up again. I think as we move forward, the combination of probably the Fed being done, inflation trending lower, probably implies that we will get, at some point, a fairly speedy decline in interest rates. And that's very accretive for gold, so I would not all be surprised if we hit new highs in the second half-- maybe earlier. Timing is always difficult but I think things are good.
But in addition to the monetary policy drivers, we continue to see very, very strong buying from central banks, from retail investors. And in fact, last year saw the most gold being purchased by the official sector--
- --ever. Well, you know, geopolitics are playing a role in this. Many portfolio managers who manage FX reserves are concerned that the US dollar may not be the reserve currency. When Russia and China talk together, some people get nervous.
Other reason, of course, is massive US debt. There's always that concern that some of it might get monetized. And I think just diversifying asset mix-- and gold has been benefiting. And it looks like this year will be not much different than last year where people are using it as a hedge. And so far, it's worked out.
- It's done pretty well, yeah. And all that stuff you just said-- none of it's gone away. In fact, probably it's gotten worse, I think, in the past little while.
- Yes, and certainly what the Fed is saying is a catalyst.
- Yeah, yeah.
- Oil-- let's talk about that. We talk about supply, economics certainly-- certainty in demand. People think about, if we go into a recession, there'll be a lot less demand for oil right now.
It was expected, I think, oil to get above-- I heard lots of people talking about $100 in the second half. And we're far from that right now. It has had a bit of a rally, but what do you see?
- Well, we still see very positive things for oil in the second half-- and I do stress second half. I think the first quarter showed a bit of a surplus. And OPEC has warned the world that the second quarter might also see more oil chasing demand than is needed.
However, as China normalizes-- and that is in spite of what might happen in the West-- we're still probably going to see an additional 1.3, 1.5 million barrels of demand increase from China as their world normalizes. As Chinese citizens travel around the world, fuel jet will benefit. And today, we've seen a fairly substantial increase on the oil inventory side, but conversely, we saw pretty significant declines on the product side.
So the products markets continue to be tight, and I think there is OPEC expediency or opportunistic behavior. If you recall back at the beginning of this dreaded pandemic, OPEC cut a massive amount of some 10 million barrels of supply. We think that they wouldn't think twice about rightsizing supply to make sure that these overages don't continue. And I think as we move into the second half and the world looks better and China normalizes, we will have a very tight market. I'm quite happy in saying that 90 plus WTI in the second half is quite possible and likely.
- I wonder-- I've only got 30 seconds here, not a fair question to ask you in 30 seconds. But the bulls will always pound the table and say, capital has been drained out of the sector because of everything that's happened. Therefore, you can't get the supply back on when we really need it, should things ramp up. Is that something that you factor in as well?
- Absolutely. When we look at US shale production, they are no longer the swing producer they used to be. And what does that mean? That ultimately gives OPEC the latitude to control supply, rightsize supply, to match demand or maybe even under demand. And they don't have to worry about losing market share, and that has been key for OPEC. And I think this trend continues.