Four factors that kept a lid on the gold trade in recent years: (1) the strength of the dollar, (2) the continued absence of inflation, (3) the extraordinary strength in U.S. equities and (4) complacency. Now you think that's all changed?
People ask what was different in the first 10 weeks of this year compared to the previous four years since the gold bubble burst. I come back to these four factors.
The dollar trade will not be as monolithic as it has been. We have this strange situation with the dollar. The country wants a weaker dollar, but every other country wants a weaker currency, too, and they are doing a better job than us. But we won't see sustained dollar depreciation.
We still haven't seen inflation in terms of core (CPI). The Fed is maybe closer to achieving its 2 percent target, though we haven't seen it. The Fed will be very cautious, and that is a big shift from what they are saying, down to two hikes, and they left open that could change, too. It could be one-and-done at this point.
Even though equities have recovered somewhat, there is no threat anymore of a 15 percent year for equities. Equities are not posing a problem.
A big factor is the change in the perception of risk, which has done a 180, even if the risks haven't changed. People are looking for risk-off assets. Risk-off trading was enough to give us a $200 rise. The perception of a riskier environment is liable to be what's governing here.
that risk assets — including high-yield debt, which had Q1 net inflows of $7 billion — and stocks have rallied, but Milling-Stanley was not convinced. "If you look through January, February and the first half of March, risk-off is what all the conversations were about. You're just looking at the last two weeks if you're talking about risk-on again. ... Stocks are still volatile if up recently.
Clients are still looking for risk-off trades. I'm now talking to financial advisors about rebuilding strategic allocations.
I think to a large extent it's investor buying, not hot money. But it's a lot easier to make the argument for a strategic position in gold when the price is going up. I think there is a good strategic argument for gold, and of course it's better if the price is going up.
I'm told the interest is coming across the board from institutions and individual investors. For 40-something years, since I first got into gold investing in the 1970s, people have been saying it doesn't pay a return. Well, guess what? Not much else does these days, either. People are charging you to store money. GLD costs less at 40 basis points annually than holding Swiss francs.
People have not missed the boat. Just five years ago gold was $500-$600 dollars higher than today. Anyone who wanted to sell back gold or wanted profit taking at $1,800 already did so. So I'm not expecting a surge in people selling back or recycling until gold goes a lot higher. This thing could run. I won't say it's going to, but it could. It showed us in 2011 it could go up dramatically.
does the fundamental supply-and-demand situation in the metals market still matter?
This is a sustainable level, given what's going on in supply demand. Cost pressures on producers are rising, and that has contributed to mine production being down for the first time since 2008. Yes, emerging market economies will move back and forth between looking strong and then less strong, but even if China is only growing at 3 percent to 7 percent, that's the best growth in the world. Jewelry demand in those emerging market areas will be good.
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