Anthony Okolie speaks with Bart Melek, Global Head of Commodity Strategy, TD Securities, about the outlook for gold in a lower-for-longer interest rate world, and the rationale for gold price to break out.
The pace of US unemployment claims declined again last week. Weekly jobless claims totaled 1.5 million, its 10th straight weekly decline. Those unemployment numbers directly related to the coronavirus pandemic, which hit a grim milestone in the US, surpassing 2 million cases of the virus, with more than 20 states and Puerto Rico seeing a spike.
The European Union says it's planning to file formal antitrust charges against Amazon over the e-commerce company's treatment of third party sellers. More merger news. Grubhub agreed to combine with Europe's Just Eat Takeaway.com in an all-stock deal worth $7.3 billion, turning its back on Uber Eats after weeks of failed negotiations. Finally, the magical kingdom is coming back to life. Walt Disney plans to reopen the original Disneyland in California on July 17, the 65th anniversary of the park's opening.
And that's a wrap of today's headlines. Next, my conversation with Bart Melek. Bart, so as of this morning, markets are falling, but gold is up. Can you explain that dichotomy for us?
- Well, certainly. Gold tends to do better when risk appetite moderates. Over the last several days, we had an extremely strong equity market, and gold wasn't particularly doing stellar things. Now that we had a shift where now we're seeing a pretty significant selloff on the S&P, gold is seen more of a safe haven. And we're also seeing interest rates along the yield curve that drop, which is also a very good indicator for gold to move higher.
- And I wanted to touch on interest rates. Lower for longer, that's where the Fed stands right now. And with that news, we saw the price of gold shoot up nearly $25. Why did the announcement of keeping interest rates near 0 until through 2020 have that effect on the price of gold?
- Mainly because we're expecting real interest rates to actually drop. The Federal Reserve has said that they're not even contemplating increasing rates. Well, the implication here is that a stimulus from the Federal Reserve, the central banks around the world, in fact, and governments ultimately will lift the economy closer to potential.
We are going to get prices moving positive. As that happens, almost by definition, we are going to get negative interest rates. And in terms of opportunity cost, gold is going to be very, very cheap to hold. And there are, of course, other issues. Issues and concerns surrounding the debasement of currency. We're worried about massive amounts of debt. So the Federal Reserve is only one part of the story. There is also a big fiscal component that gold traders are looking at.
- And talking about interest rates again, in fact, rates could stay near 0 beyond 2022 if the US economy put it on track to achieve its maximum employment and price stability goals. What could happen to gold prices if rates remain at such low levels almost indefinitely?
- Our forecast right now is that as we move further into 2020, gold price moves higher. And next year, we're looking at $2,000, possibly higher, towards the end of the year. By that time, we expect inflationary pressures to start building.
Not only because of the robust monetary policy, but also we believe that there are going to be structural changes within the global economy where supply chains will be brought back to developed countries, from China and other places. Critical things like pharmaceuticals, things like respirators, things of that nature.
And we think as those supply chains get frayed a little, that that will be a bit of a negative supply shock, and the central banks will accommodate. That means that we should see a significant amount of inflation pressure-- not yet, but as we move into the future.
- And talking about inflation. If there's no real inflation risk, isn't that a negative for gold prices?
- Well, not necessarily. Because gold price, fundamentally, will respond to real interest rates. So it's not so much about what the inflation rate is, per se, but more accurately is what central banks or monetary authorities, if you'll like, will do.
If inflation, in fact, is low, we could very well see central banks do whatever they can to move those inflation expectations higher, because a deflationary spiral is extremely dangerous. So ironically, we're in a situation, possibly, that, if inflation goes down, gold does better because real interest rates could be pushed further.
Very interesting-- Mr. Powell didn't talk about negative interest rates. But he didn't definitely say they're not in the cards at all. And we've seen a period of time in North America where Fed fund futures were actually showing negative rates. We're not saying that's the base case. But certainly, there could be a risk if we see a disinflation.
We don't expect it. So either way, gold is in a sort of positive catch-22 situation here. If inflation moves higher and the Fed stays in the 0 bound, that's good for gold. If inflation tends to go lower, the Federal Reserve will move heaven and earth to make sure that inflation moves up and will stimulate in any way it can and will use tools that it hasn't used yet.
- As an investor, if I'm bullish on gold, how do I play the gold market right now? How can I play gold?
- Well, I think there are several ways of, of course, playing it. There is, of course, the traditional way that's been around for literally thousands and thousands of years buying physical bullion. You can buy things like ETFs that are backed by bullion or reflect or have bullion as a security within them. And of course, mining companies, which are the producers, should ultimately have a positive beta to the underline.
- And we just have a few seconds left. But we've also seen the price of oil decline significantly. Can you explain what's causing that drop?
- I think several things. The market was pretty much priced for perfection here. We were looking at pretty robust declines in US supplies. Saudi Arabia recently cut a million barrels, and then we had the agreement over the weekend which extended the 9.7 million or so of cuts.
But Saudi Arabia has also made it clear with some allies that the extra cuts aren't going to continue. And at the same time, we're looking possibly at more production from US shale. And we, of course, have a bit of a problem on demand expectations as infection rates in some US states are increasing.
So market was priced for perfection. We didn't get perfection from OPEC plus in terms of announcements. You know, it was, I think, to some, a little bit of a disappointment. And now we're seeing it's lower. In fact, we, in our model portfolio, have unwound our long spread that's on that.
- Bart, thank you very much for your time.
- It was my pleasure. Thank you.