Kim Parlee speaks with Bart Melek, Global Head of Commodity Strategy, TD Securities, about the outlook for the best-performing major asset class in the past year, including the rationale for gold to reach all-time high levels.
- Hello, and welcome to the MoneyTalk COVID-19 Daily Bulletin for Monday, May 25. I'm Anthony Okolie. In a few minutes, Kim Parlee will be speaking with Bart Melek, global head of Commodity Strategy at TD Securities on the possibility of gold climbing to $2,000 an ounce. But first, a quick wrap of today's headlines.
Could cheaper telecom fees be coming? Telecom companies, including Canada's Big Three, are being pressured to make internet and sell access more affordable for the poorest Canadians amid the COVID-19 pandemic. Meanwhile, technology giants, such as Google, Facebook, and Amazon, could be forced to pay higher taxes in Europe, as governments search for new revenue to deal with the ongoing coronavirus crisis.
The US will prohibit the entry of most non-US citizens arriving from Brazil, where coronavirus cases have spiked to the second highest in the world, expanding restrictions already placed on visitors from China and Europe. And finally, Elon Musk's SpaceX is preparing to be the first private firm to launch an astronaut into space.
Wednesday's mission would be the first from US soil in nearly a decade and will carry the astronauts to rendezvous with the International Space Station. And that's a wrap of today's headlines. Next, Kim Parlee's conversation with Bart Melek.
- Bart, you recently wrote a report that saying that gold could be on its way to $2,000, though, it could be a bumpy road. Tell me what is the case for gold prices moving up? They've already moved up about 30%.
- Well, we like gold longer term. And we think it could easily move above $2,000. The big key is, I think, low interest rates. Particularly we think that as time moves on, we're going to have negative interest rates going forward.
Part of the reason, I think we're going to have higher inflation due to less globalization, probably a negative supply shock globally because of COVID. And this phenomenal amount of liquidity and money printing that is going on will be result in inflation. But central banks will very likely keep rates low. And in our opinion, that is a very good case for high gold prices.
KIM PARLEE: I want to unpack all that, because there's a lot of information you just imparted there in terms of all the reasons why. But it's interesting, because if I think back to the 2008 financial crisis or any other previous crises, there's been lots of calls for gold to get to $2,000 or higher. So is everything you're talking about significantly materially different or that it's going to cause it to happen this time of year?
- Well, you know, I would argue that in today's dollars, the peak price, post the financial crisis, in fact, was above $2,000 I believe by our calculation. And in today's dollars and the 2020 dollars it was about 2,100. So a move towards 2,000 is not a lot of historical precedent based on what has happened.
I think this time around, we're going to have even more aggressive central bank money creation, in essence, and continued purchases of government bonds and, indeed, other bonds, corporate bonds, now, by various central banks. And that includes, of course, the Federal Reserve. And Bank of Canada is doing it as well. And it could likely continue for the foreseeable future.
- You mentioned, though, it's a bumpy road. And you said I think recently in your note, as well, that the environment is not quite right for the breakout just yet. So take me through what, why, and then what you see happening after that.
- That's certainly not a particularly popular view with some of my followers who are bullish. But I think in the short run, the risk is disinflation. We will very likely see May data print very, very badly. We're going to have extremely high unemployment rates up, not, of course, only in North America, but across the world.
And I think, at least, temporarily, we could see disinflationary pressures here. We've already seen CPI prints in negative territory. And I think that that could continue as unemployment rises, as people lose their income and are very much in a liquidity crunch. And there will be fear of folks going insolvent.
And a large portion of the population is not paying rent. We're not seeing small businesses pay rent. And that very much could be disinflationary. And what that means is that assuming the Federal Reserve and other central banks won't necessarily move with even lower rates-- in fact, the Federal Reserve is quite adamant in saying that they will only get them to zero and not into negative territory.
For the time being, we could very well see real rates rise. And that hasn't been particularly good as for gold. And we continue to see fairly robust risk markets where there isn't the same type of instead of incentives to move them to gold for now.
- One thing I think that I think is fascinating in this discussion is just that transition from that period of disinflation you're talking about because of unemployment to-- because of what the central bank is doing moving to an inflationary environment and because of maybe trade tensions and a deglobalization of what's going on. But maybe you could just tell me about how you see that transition going. I mean, where, I guess, the when or what's going to be the pivot point on that?
- Well, I think, as the global economy stabilizes-- North America stabilizes-- and we move into normality, I think we will find ourselves in a pretty severe negative supply shock. In essence, there will be, I think, a significant proportion of productive capacity simply going away. And that will likely move prices higher.
We already are hearing talk of bringing in a lot of critical supply chains back home. And that is very much a global phenomenon. And that will include medical products, pharmaceuticals, some key technologies. Chances are that will result in higher prices. We're working domestically with higher labor, higher input costs. So that will be a negative supply shock.
And you will have monetary authorities and very much governments provide spending trying to get the economies back to potential. And that would be accommodating the negative shock, which could, in my opinion, result in inflation. Some are quite worried that we will have currency debasement over the long run with these negative rates.
And that's probably true. Your dollars will buy less over time if inflation is above zero and rates are at zero. So almost by definition, bond holders will have less. And gold-- well, gold yields zero nominal yield. But quite often, that's better than negative. And we are still seeing negative yields offered by many, many securities right now, not so much US treasuries, but others are.
- All right, great insight as always. Thanks so much for joining us.
- It was my pleasure.