President Donald Trump has been trying to keep the promises he made on the campaign trail. Markets have cheered the record highs, but could there be an opportunity in gold? Bart Melek, Global Head of Commodity Strategy at TD Securities speaks with Sara D’Elia about how gold may be playing catch-up.
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00:00:08.140 Over the last few weeks, President Donald Trump
00:00:10.210 has been trying to make good on the promises he made back on the campaign trail,
00:00:14.270 from negotiating NAFTA to putting up tariffs and the wall.
00:00:17.740 Markets have reacted positively to the tough talks,
00:00:20.200 but my guess is it might be time that gold starts to play catch-up.
00:00:23.830 Joining me is Bart Melek, Global Head of Commodities Strategy at TD Securities.
00:00:27.760 Thank you for joining me.
00:00:29.320 Why do you see a case for gold going up, Bart?
00:00:31.840 Well, I think the market was pricing perfection from Donald Trump.
00:00:36.130 And certainly by the way the first two weeks are going,
00:00:39.580 we're not seeing any perfection from the new administration.
00:00:42.970 It certainly looks like in the aftermath of the failure to pass the Obamacare repeal
00:00:49.990 and replace, now there are doubts that the stimulative package that was promised
00:00:56.620 and that would take the form of lower taxes and more infrastructure spending
00:01:01.060 may also be delayed.
00:01:02.500 This means there's less incentive for the central bank in the US
00:01:09.250 to hike rates and limit growth.
00:01:13.559 Now what are the dynamics that are happening right now?
00:01:15.850 Because you and I had chatted back at the beginning of the year,
00:01:18.850 and you were pretty bullish on gold.
00:01:20.750 So right now, do you like gold even more than you did then?
00:01:24.790 Well, we still like it pretty much the same.
00:01:26.650 Our forecast hasn't changed, though we are quite
00:01:29.620 happy that our morose view of the world has materialized, I guess.
00:01:37.750 We still see, however, gold moving higher.
00:01:40.390 By the end of the year, we're looking at 1,275 average for the quarter
00:01:45.700 and probably testing the 1,300 level.
00:01:48.520 So your call previously was 1,256, but you're expecting it to go a bit higher.
00:01:53.050 Yeah, that's the annual average.
00:01:55.420 But the quarterly averages will move up from here on.
00:01:59.170 For this quarter, we're looking at about a 1,225 average, which is pretty much where
00:02:03.580 we're trending right now.
00:02:04.960 Now on the flip side of that, you say that assuming
00:02:07.660 proposed tax cuts, spending increases, trade deals, and import taxes materialize,
00:02:13.750 it could be bad for gold.
00:02:15.010 But it's good for equities and the US dollar.
00:02:19.990 If the Trump administration does give us perfection on the policy side
00:02:25.270 and delivers the robust tax cuts in the form of corporate and consumer cuts
00:02:32.770 on the tax side, that will likely mean higher profitability.
00:02:36.640 It will likely mean more spending.
00:02:39.190 And given the fact that the US economy is already
00:02:43.060 nearing full employment or full capacity, chances are, under that scenario,
00:02:48.880 the US Federal Reserve would be somewhat more aggressive in the way it
00:02:53.770 handles the interest rate outlook.
00:02:57.160 It would probably lift rates more.
00:02:59.110 And that means higher dollar and higher opportunity cost of holding gold, which
00:03:04.270 is never good news for a price.
00:03:07.060 Bart, in your note, you draw on the 1985 Plaza Accord.
00:03:10.334 Is that something you're watching?
00:03:11.750 What is it?
00:03:12.340 Why are you looking at similarities there?
00:03:15.130 Well, we certainly have looked at the Plaza Accord, signed in 1985.
00:03:19.930 And this was essentially an agreement between the United States
00:03:23.620 and its key trading partners to solve the problem of large current account
00:03:28.510 deficits that resulted from poor export activity
00:03:34.000 to the rest of the world as the US dollar surged.
00:03:37.090 This was done under the Reagan administration--
00:03:40.900 an attempt to lower the value of US dollar to restart exports and manufacturing
00:03:45.850 activity in the United States.
00:03:47.830 At the current situation right now, do you think
00:03:49.840 we could be looking at something similar-- a Plaza Accord 2.0?
00:03:54.850 I'm not sure if we're going to get any sort of accord like that.
00:03:59.270 The environment structurally and politically is much different.
00:04:03.220 But certainly that is something the market will be wise to look at,
00:04:09.640 basically to give us an idea how we could see the US economy
00:04:15.990 and the current account situation deteriorate if the US dollar were to surge, for example,
00:04:23.860 as a response to higher rates if the US economy performs well.
00:04:29.110 In your note, you've also warned that in terms
00:04:31.150 of the overall tone, if the US acts aggressively,
00:04:35.050 either by depreciating the US dollar or by introducing new taxes,
00:04:38.500 there could be some risks.
00:04:40.210 What do you think the risk could be for the economy, for equities, and even for gold?
00:04:45.290 Well, first of all, if the US does lower the dollar somehow,
00:04:50.320 that will likely create some sort of an inflation risk.
00:04:55.510 And the very fact that you would have a lower dollar is positive for gold.
00:05:00.500 You add to that an inflation risk and maybe a Federal Reserve that's
00:05:05.860 still unwilling or unable to act aggressively-- that means in real terms,
00:05:12.870 the opportunity cost of holding gold deteriorates.
00:05:16.020 And that's pretty positive for gold.
00:05:18.720 Of course, the risks are of much more aggressive increases in interest rates
00:05:25.290 once you have an inflation problem down the road.
00:05:27.960 Thank you very much.
00:05:29.072 My pleasure.
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