The U.S. Federal Reserve is widely expected to lower interest rates at either the May or June meeting. Daniel Ghali, Senior Commodity Strategist with TD Securities, tells MoneyTalk’s Greg Bonnell why he thinks many investors may be under-positioned in gold when interest rate cuts start.
Print Transcript
[AUDIO LOGO]
While the US Federal Reserve has preached patience when it comes to rate cuts, our featured guest today says that investors may be historically underpositioned for the moves that gold might make when those cuts arrive. Joining us now to discuss is Daniel Ghali, Senior Commodity Strategist with TD Securities. Daniel, great to have you back on the program.
Yeah. Thanks for having me.
So this is the year that we entered awaiting rate cuts. The thought is they still will come, even though we need to be a little bit patient, as we were saying. But what about gold? What does it all mean for gold? And what are you seeing in the market?
Well, the start of the timing of a rate-cutting cycle is less relevant for gold than the total number of cuts on the horizon that we could expect. What's interesting in the gold market is that, today, investors are historically under-positioned for a Fed cutting cycle. And why wouldn't they be? If you think about the last few years, macro traders, in particular, in gold have been repeatedly wrong footed. The types of indicators that they look like, things that we've discussed before like real rates or the broad US dollar have led them astray time and time again.
What's interesting, though, is that despite the fact that these macro traders are underpositioned-- that, in fact, after the strong series of growth data, in particular, in the US, they've built up a sizable net short position-- gold prices are still near all-time highs. So what gives, right?
And the answer to that is actually from physical markets. If you look at the relationship between gold and real rates over a very long-term horizon, that relationship is fairly stable. But there are moments in time where large changes in real rates don't really have much of an impact on gold. That's happening today.
And the last time this happened was in the early 2000s, which is an era where physical markets were larger, or larger forces, than financial markets in gold. And that's really the reason why gold prices haven't sold off, even though macro traders are shorting it.
So macro traders shorting, underpositioned in terms of what could happen from the Fed. When we do get to the point that we do see some rate cuts from the Fed-- and I think at TD Securities, the thinking still is you're going to probably get some cuts by the summer. Robert Both was on earlier this week.
What does it start meaning for gold? What could it do to the price of gold? And what could it do to the trade? Would everyone start sort of rushing into that trade?
Well, certainly, historically, you see a very large amount of capital that starts to move into gold. And the reasoning behind that is very simple. The cost of carrying gold in this moment in time is actually quite elevated. And that relates to the cost of funding your long gold position. The US dollar interest rate is quite high, so that keeps people from buying gold.
As that rate comes down, it makes it easier and reduces that opportunity cost for folks to start buying gold. What we would expect, though, and we do think the Fed is going to cut rates for the first time in May, and, in fact, we have--
As early as May? Really?
Absolutely. Yes. And our forecasts are actually for a deeper Fed cutting cycle than the market is currently pricing in, because we still expect a meaningful slowdown in growth. Even though we're no longer anticipating a recession in 2024 in the US, we are expecting growth to slow more materially than the market thinks. And that should be accompanied with more meaningful Fed cuts on the horizon.
So right now on my screen, I have an ounce of gold at $2,031. The thesis starts to play out. The Fed starts cutting rates, they go deeper, as you said, perhaps, than the market's anticipating. Do we have substantial upside for gold here?
We think so. We think gold prices can trade on an average quarterly basis as high as $2,250 by the second quarter of this year. And, really, that's on the back of the strong physical market activity that we've seen but also this rush of capital from the investor side, which has really been the missing piece for gold to sustain new all-time highs for the time being.
Is the biggest threat to that thesis simply that inflation in the States-- it seems that we're getting our headline inflation down in Canada and our core inflation down. Last print from the US side was a little bit sticky. Is that the biggest threat to the thesis right now for gold, that inflation doesn't behave?
From the macro side, absolutely. But what's interesting is, again, macro traders now are net short in gold. They've already taken positions that are consistent with that view. The other side of the equation, the physical markets, is really what's interesting here.
The exceptionally strong demand that we've seen so far this year out of China isn't just associated with the lunar new year celebrations. That tends to be the seasonal peak in Chinese buying activity, but we're seeing that buying continue and persist beyond that horizon. We also know in India there's been a very substantial amount of purchases of precious metals more broadly.
And that's the same case in many parts of the world, including the Middle East and Turkey as well. So these flows are now larger than the downside pressure that we might see from macro traders from stickier inflation than expected.
I want to talk about silver now. And fairly or not, sometimes referred to, I believe, as the poor man's gold. But you're noticing interesting things in this market too.
Absolutely. So so far this year, silver has pretty dramatically underperformed gold. That is consistent with the macro story that we've been discussing. But when you start to look on the horizon, there's a few very large assumptions that are being taken for granted in the market that we think could be challenged.
The first is that one of the large assumptions in silver markets is that you will always have silver that is available. This is a metal that is very intensively used in industrial capacity. Solar is increasingly the largest structural driver of demand growth for silver. And we expect that to continue on the horizon.
Most market forecasters out there expect a structural deficit on the horizon. So I think that begs the question, is there a moment in time where the very large amount of silver inventories that have accumulated over the last several decades are going to be wound down, by the strong industrial demand, particularly from the solar complex? And if that does happen, how will we incentivize investors to sell their physical silver holdings in order to satisfy physical market demand?
I was thinking, too, how do you incentivize miners to take more silver out of the ground? It's an interesting time in the fact that we look to a lot of metals that we're going to need for different kind of transitions. I think we'll talk about that later.
But then, are we mining enough of it? If we end up with a structural deficit of silver-- it has industrial purposes, as you said, and we need more of the stuff-- are the miners going to put the money in to take it out of the ground?
Well, interestingly, silver is very traditionally mined as a byproduct of other metals. So it's a byproduct of zinc mines, lead mines, gold mines, and so on and so forth.
So there is a very well-discussed theme of structural underinvestment in mining activity. That's been the case for the past 12 years, at least. And that is now having an impact on silver, right? The difference in silver markets-- this theme is appreciated in other base metals markets. For copper, we've spoken about it before, for instance. But the difference in silver markets is that there is that assumption that there will always be silver available, given that--
Don't worry about it. It's always coming out of the ground when we pull other things out of the ground, right?
Well, I think people expect-- nobody's throwing away their silver. Every ounce of silver that has been mined for a very, very long time still exists somewhere in some form. The question is, how much of it is actually freely available for purchase? And when we crunch the numbers, we find a significant portion of it is actually not available for purchase, or at least not at current prices. [AUDIO LOGO]
[MUSIC PLAYING]
While the US Federal Reserve has preached patience when it comes to rate cuts, our featured guest today says that investors may be historically underpositioned for the moves that gold might make when those cuts arrive. Joining us now to discuss is Daniel Ghali, Senior Commodity Strategist with TD Securities. Daniel, great to have you back on the program.
Yeah. Thanks for having me.
So this is the year that we entered awaiting rate cuts. The thought is they still will come, even though we need to be a little bit patient, as we were saying. But what about gold? What does it all mean for gold? And what are you seeing in the market?
Well, the start of the timing of a rate-cutting cycle is less relevant for gold than the total number of cuts on the horizon that we could expect. What's interesting in the gold market is that, today, investors are historically under-positioned for a Fed cutting cycle. And why wouldn't they be? If you think about the last few years, macro traders, in particular, in gold have been repeatedly wrong footed. The types of indicators that they look like, things that we've discussed before like real rates or the broad US dollar have led them astray time and time again.
What's interesting, though, is that despite the fact that these macro traders are underpositioned-- that, in fact, after the strong series of growth data, in particular, in the US, they've built up a sizable net short position-- gold prices are still near all-time highs. So what gives, right?
And the answer to that is actually from physical markets. If you look at the relationship between gold and real rates over a very long-term horizon, that relationship is fairly stable. But there are moments in time where large changes in real rates don't really have much of an impact on gold. That's happening today.
And the last time this happened was in the early 2000s, which is an era where physical markets were larger, or larger forces, than financial markets in gold. And that's really the reason why gold prices haven't sold off, even though macro traders are shorting it.
So macro traders shorting, underpositioned in terms of what could happen from the Fed. When we do get to the point that we do see some rate cuts from the Fed-- and I think at TD Securities, the thinking still is you're going to probably get some cuts by the summer. Robert Both was on earlier this week.
What does it start meaning for gold? What could it do to the price of gold? And what could it do to the trade? Would everyone start sort of rushing into that trade?
Well, certainly, historically, you see a very large amount of capital that starts to move into gold. And the reasoning behind that is very simple. The cost of carrying gold in this moment in time is actually quite elevated. And that relates to the cost of funding your long gold position. The US dollar interest rate is quite high, so that keeps people from buying gold.
As that rate comes down, it makes it easier and reduces that opportunity cost for folks to start buying gold. What we would expect, though, and we do think the Fed is going to cut rates for the first time in May, and, in fact, we have--
As early as May? Really?
Absolutely. Yes. And our forecasts are actually for a deeper Fed cutting cycle than the market is currently pricing in, because we still expect a meaningful slowdown in growth. Even though we're no longer anticipating a recession in 2024 in the US, we are expecting growth to slow more materially than the market thinks. And that should be accompanied with more meaningful Fed cuts on the horizon.
So right now on my screen, I have an ounce of gold at $2,031. The thesis starts to play out. The Fed starts cutting rates, they go deeper, as you said, perhaps, than the market's anticipating. Do we have substantial upside for gold here?
We think so. We think gold prices can trade on an average quarterly basis as high as $2,250 by the second quarter of this year. And, really, that's on the back of the strong physical market activity that we've seen but also this rush of capital from the investor side, which has really been the missing piece for gold to sustain new all-time highs for the time being.
Is the biggest threat to that thesis simply that inflation in the States-- it seems that we're getting our headline inflation down in Canada and our core inflation down. Last print from the US side was a little bit sticky. Is that the biggest threat to the thesis right now for gold, that inflation doesn't behave?
From the macro side, absolutely. But what's interesting is, again, macro traders now are net short in gold. They've already taken positions that are consistent with that view. The other side of the equation, the physical markets, is really what's interesting here.
The exceptionally strong demand that we've seen so far this year out of China isn't just associated with the lunar new year celebrations. That tends to be the seasonal peak in Chinese buying activity, but we're seeing that buying continue and persist beyond that horizon. We also know in India there's been a very substantial amount of purchases of precious metals more broadly.
And that's the same case in many parts of the world, including the Middle East and Turkey as well. So these flows are now larger than the downside pressure that we might see from macro traders from stickier inflation than expected.
I want to talk about silver now. And fairly or not, sometimes referred to, I believe, as the poor man's gold. But you're noticing interesting things in this market too.
Absolutely. So so far this year, silver has pretty dramatically underperformed gold. That is consistent with the macro story that we've been discussing. But when you start to look on the horizon, there's a few very large assumptions that are being taken for granted in the market that we think could be challenged.
The first is that one of the large assumptions in silver markets is that you will always have silver that is available. This is a metal that is very intensively used in industrial capacity. Solar is increasingly the largest structural driver of demand growth for silver. And we expect that to continue on the horizon.
Most market forecasters out there expect a structural deficit on the horizon. So I think that begs the question, is there a moment in time where the very large amount of silver inventories that have accumulated over the last several decades are going to be wound down, by the strong industrial demand, particularly from the solar complex? And if that does happen, how will we incentivize investors to sell their physical silver holdings in order to satisfy physical market demand?
I was thinking, too, how do you incentivize miners to take more silver out of the ground? It's an interesting time in the fact that we look to a lot of metals that we're going to need for different kind of transitions. I think we'll talk about that later.
But then, are we mining enough of it? If we end up with a structural deficit of silver-- it has industrial purposes, as you said, and we need more of the stuff-- are the miners going to put the money in to take it out of the ground?
Well, interestingly, silver is very traditionally mined as a byproduct of other metals. So it's a byproduct of zinc mines, lead mines, gold mines, and so on and so forth.
So there is a very well-discussed theme of structural underinvestment in mining activity. That's been the case for the past 12 years, at least. And that is now having an impact on silver, right? The difference in silver markets-- this theme is appreciated in other base metals markets. For copper, we've spoken about it before, for instance. But the difference in silver markets is that there is that assumption that there will always be silver available, given that--
Don't worry about it. It's always coming out of the ground when we pull other things out of the ground, right?
Well, I think people expect-- nobody's throwing away their silver. Every ounce of silver that has been mined for a very, very long time still exists somewhere in some form. The question is, how much of it is actually freely available for purchase? And when we crunch the numbers, we find a significant portion of it is actually not available for purchase, or at least not at current prices. [AUDIO LOGO]
[MUSIC PLAYING]