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In a low interest rate environment, gold shines brighter than bonds – Wells Fargo

Kitco News

The gold market has plenty of room to run higher but investors should not expect to see record highs by the end of the year, according to John LaForge, head of real asset strategy at Wells Fargo.

With gold prices holding critical support above $1,700 an ounce and already seeing double digit gains for the year, LaForge said that gold is having a pretty good year. He added that gold will continue to do well as central banks pursue never-ending quantitative easing measures and low interest rate policies.

“Many investors are looking at gold as a hedge against the money printing and low interest rates, and the idea that frankly, we don't know what the consequences are,” he said.

LaForge said that even without introducing negative interest rates, the Federal Reserve still has plenty of ammunition to support the U.S. economy that has been devastated by the COVID-19 pandemic. He added that this will continues to push inflation pressures higher and support gold prices.

With interest rates at or below zero, LaForge said that gold shines as an alternative to bonds as a safe-haven asset.

“There are many investors out there that don't trust their governments, to keep the fiscal houses in order and even monetary houses in order,” he said. “And if they want a safe haven and bonds aren't paying them anything. Hey, at least gold is agnostic towards a government.”

LaForge said that he even sees potential for gold prices to do well in the current deflationary environment as the U.S. tries to spur growth and ease its two-month lockdown measures. He added that a deflationary environment will lead to stronger responses from governments and central banks.

“I actually seen deflation as kind of a trigger to get gold going,” he said.

Although LaForge is bullish on gold, he said that he is not expecting prices to break to a new all-time high by the end of the year. He noted that the $1,900 an ounce target is extremely important and it could take some time to break that level.

“[Gold] stuck in a bear market. No commodity today is anywhere close to where the highs were 10 years ago. So gold is fighting that trend. We really need to see gold break out of the $1,900 range convincingly and then it could get really interesting.”

As to holding gold in a portfolio, LaForge said that the general rule of 5% to 10% continues to apply; however, he added that when prices break above $1,900 that is when investors should reevaluate their holdings.

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