Gold recently formed a bearish technical signal called a ‘death cross pattern’ leaving some investors fearful that the price has nowhere to go but down. Bart Melek, Global Head of Commodity Strategy, TD Securities, explains how central bank signals, trade discussions and currency moves could be good for gold.
Gold recently formed a bearish technical signal called a "death cross pattern". That move left investors worried that the price has nowhere to go but down. Here to explain why he thinks it's too early to write an obituary for gold is Bart Melek from TD Securities. Thanks for being here.
Yeah, great to be here.
You break your report up into two parts, Bart. The first is central banks. The second is currencies. I want to start with central banks.
Historically, there has been a bit of a correlation between the Fed and gold prices. If the Fed is perceived to be hawkish, the price of gold goes down and vice versa. What can you tell us about the disconnect that's happening right now?
Well, what we've seen recently is yields, in the United States in particular, have been dropping. And that's after a period of significant increases. And typically, what you would expect is gold to perform better.
The reason usually for that is that opportunity cost of holding a zero-yielding asset like gold goes down when yields drop. We've seen yields migrate lower, and gold has continued to move lower and lower. And in our view, this is because of the currencies market overpowering the signals coming from the interest rate market.
And in terms of the Fed and other central banks as well, they're focused on a few things right now. The first one is uncertainties related to trade. The second one is that there's higher debt levels across the board. And the third is we've seen some disappointing economic data. How do you think that's going to impact their tone?
Well, we think that the tone is probably going to get somewhat less hawkish in comparison to what we have seen. Recently, I think, the Fed continues to hike. But I think they may be a little bit more guarded about their enthusiasm to increase interest rates. And that should ultimately spell good news for gold.
One thing you highlight in your report-- and moving to currencies-- is that a stronger US dollar versus emerging market currencies has put some downward pressure on the price of gold. How do you see that matrix or that trend evolving?
This all started with the president of the United States getting very aggressive with China on its trade file. And there is a concern out there that we will see a tit-for-tat trade war develop, which would be quite bad for global trade flows.
And conversely, it would mean that some emerging economies could be under pressure. China certainly is one that comes to mind. But, of course, all other emerging markets that are part of the supply chain in China could have a difficult time as well. And we've also seen the US dollar rise not only relative to emerging currencies but also to the Western currencies.
And that typically means that the payment costs to maintain their debt in domestic currencies could rise. That associates with less physical demand in that part of the world. Certainly, the Chinese currency has devalued recently. And we've seen poor flows into China.
Now, one of the things that makes me very happy as a host is we had you on the show at the beginning of the year. And your outlook for gold seems largely similar to where it is today. But when you add in the layer of central bank expectations and currencies, what's your outlook going forward?
We still are fairly bullish for gold. We don't expect major central banks, including the Federal Reserve, to be overly hawkish. In fact, we think that they're going to be quite measured in how they remove monetary accommodation out of the system and how they tighten.
We've seen some deterioration in economic data in the United States and, in fact, globally where before, we've seen expectations of beats and the market has done better than what was expected. Now, we're seeing the reverse where economic numbers are coming in somewhat weaker than the consensus was thinking. This ultimately has led, in my opinion, to rate pressures abating globally.
In terms of a price target, Bart, where would you peg gold in the next little while?
Well, by the end of 2019 in the last three months of the next year, we're looking at an average of around $1,375 or so. And there is quite a strong possibility that we'll hit $1,400.
Bart, it's great to have you on the show. Thanks very much.