The price of gold has surged since the collapse of Silicon Valley Bank, as investors bought into the metal’s safe-haven appeal. Greg Bonnell speaks with Bart Melek, Global Head of Commodity Strategy at TD Securities, about the outlook for the precious metals market.
* Joining us now to discuss, Bart Melek, Global Head of Commodity Strategy with TD Securities. Great to have you back, Bart. A lot of developments in the past several days. It has played out in the precious metal gold. What are you seeing out there?
* Well, hello. Great to be here. Well, it has been interesting, to say the least. Gold has rallied quite aggressively over a period of two days, actually. So that was Friday and Monday. But today, we're off a little bit.
* I put out a note yesterday essentially saying that the ferocity of this rally will likely slow down. And I think there will be some additional reversals. I don't think we have a rout. I don't think we go to levels prior to this bank event or the US labor data. But I think we likely will trend a little lower.
* And this is, essentially, why-- inflation continues to be a problem, as we've seen today. On the margin, things look a little bit better, but still, several times over and above where the Fed's inflation target of 2% is. So it's very unlikely that the US central bank reverses course right away. They may very well lift rates a lot less than we thought, perhaps even no hike next Wednesday.
* But I don't really see a reversal and a cut anytime soon given the inflation data. In fact, gold started to do better after the payrolls numbers, which was mixed. We had an above expectations jobs figure at 311. But there was a little bit lower than expected wage growth. And that triggered the rally in gold. And then we've had the Silicon Valley Bank issue, which, well, increased risk a lot and got people to go to safety.
* What we've seen is, as a result, rates across the board dropped. And that basically meant that with such a large decline in rates across the Treasury curve, we've seen a significant decline in real rates. And that helps gold.
* We've also seen a pretty significant reduction in future Fed funds expectations. I think some of it might have been knee jerk, but it drove the market. The other factor was the US dollar fell because of the yields. And that, again, helped gold here.
* Today, it's a little different. Things seem a little bit more stable. The US authorities acted very quickly and, essentially, have underwritten depositors over and above insurable levels. So the risk off sentiment has reversed, as you've just mentioned.
* I find it fascinating amid all of this very fascinating developments of the past couple of days. When I saw gold starting to take off, I thought, OK, well, at least that's the part of the world that I understand. Over the past couple of years, sometimes gold didn't react the way, to risk, that I thought it would. But it did seem to play out as that classic safe haven play.
* Yes, it did. And I think the key difference between what has happened now and previous periods where we've had a crisis, we've pretty much decided right away that both the Treasury and the US Federal Reserve would come to the rescue. And I don't mean give money right, left, and center, but prevent systemic risk from getting out of hand.
* And that generally implies lower interest rates and maybe more liquidity. And gold responds positively to that. Previous times in 2008, I still remember that, and immediately in the aftermath of COVID collapses, gold didn't do so well. And that was because the reaction by authorities wasn't as speedy, and we were quite worried about liquidity, and we were quite worried about the solvency of the entire financial system.
* And gold was sold to cover margin and to get cash. We didn't really see that this time around. We actually saw short covering that was occurring prior to the employment data. No one, I would say, expected a collapse of a major bank, though. And those shorts were unwound and people went long thereafter.
* But I think now, things are a little bit more stable. And we think there's a bit of a reversal. But we're very bullish longer term.
* Let's talk about the longer term, then, because ultimately, it seems that the big macro overhang is still there. It's the Fed. Maybe the math has changed a little bit in terms of the market. But this is what the Fed does now that has to consider a bank collapse and with its formula. But is it really just about the path of the Fed for the rest of this year when we talk about gold or, perhaps, some other commodities?
* I think it's quite important. Ultimately, the Fed probably still increases rates, but most likely at a slower pace than the market price previously. No one knows for sure how that's going to turn out, but I think the consensus is building that the next move is not going to be 50 basis points. Many are considering 0 or 25.
* And I think the contingent is split whether it's 25 or 0. No one is really talking 50 anymore. And also, we're pricing in a speedier pivot towards a dovish policy. Well, that probably means, if that happens, that rates on the short end of the curve, in particular, will start slumping-- we've already seen the longer end of the curve do that, we have inversions-- ahead of inflation.
* So probably the Federal Reserve sees tightening right now in the credit markets aside from areas they control and may very well decide that rates don't have to go as high as previously and may not have to stay there for as long. And that is a good environment for gold, mainly because you can envision a world where inflation could hold above 2% for a prolonged period, making the opportunity cost of holding gold quite low and having it as a hedge against inflation. After all, gold is a real asset that requires labor, requires energy, capital inputs, all sorts of things to produce that ounce.
* And if investors and others buy it up, the marginal cost ends up being, over the long run, determined by production. And if that is going up and gold keeps pace, you can imagine that gold holds its own and might be even lifted up more as investors try to seek protection from possible inflation.