US Bank's Haworth: rising Fed balance sheet should support gold prices
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(Kitco News) - US Bank Wealth Management has a “constructive” view on gold prices and sees a role for the yellow metal in a portfolio as a diversifier, said Rob Haworth, senior investment strategy director.
Prices have been boosted so far in 2020 by the economic fallout – and all of the ensuing stimulus measures and accommodative monetary policy – from the COVID-19 pandemic, although gold has largely been sideways over the last several weeks.
In an interview with Kitco News, Haworth listed three main factors that are likely to influence gold going forward: inflation, real yields and central-bank balance sheets. The last one – central-bank balance sheets – is the one that may drive gold the most, he said. The Federal Reserve has initiated what market watchers have characterized as unlimited quantitative easing.
“Since the price of gold has been flat for so long, it’s probably fairly valued relative to the current level of the Fed balance sheet,” Haworth said. “Obviously, today it’s being helped by the additional balance-sheet increase from the European Central Bank. But over time, as the Fed balance sheet grows, that should help gold prices rise higher.
“So we’re modestly constructive on gold as we head into year-end, really based on that central-bank balance sheet. As the Fed provides more clarity…that could drove gold prices further [and] faster.”
Markets will be watching communications from Fed policymakers after the next couple of meetings for more guidance on monetary policy going forward, Haworth added.
Meanwhile, Haworth said inflation expectations are likely to be flat over the next couple of months. But eventually, he looks for an uptick headed into year-end.
“So that should generally help gold,” he said.
Also, real yields – which factor in inflation – could improve, especially if economic growth picks up, he continued. But if so, that could be a “slight headwind” for gold.
US Bank Wealth Management sees room for gold in a diversified investment portfolio as a hedge against any weakness in so-called risk assets, as well as providing an opportunity in the event of a “reflation” trade, the strategist explained.
“When we think about a traditional stock-bond portfolio, we are looking for things that do well in equity-market-drawdown scenarios,” Haworth said. “Gold would be second on our list behind long-duration U.S. Treasury bonds.
“The caveat about that is gold does well right up until you run into a liquidity crisis. We saw this [in March]. When the liquidity crisis hit, gold really suffered, and then it bounced back very strongly as the liquidity crisis was abated by fiscal stimulus and monetary easing.”
Spot gold topped $1,700 an ounce in early March for the first time since late 2012, then tumbled to nearly $1,450 later in March as equities went into a free fall. Analysts and fund managers at the time attributed the sharp decline in the yellow metal to investors having to liquidate all assets to raise cash due to the collapse in risk markets, as occurred during the 2008 financial crisis. However, once this gold selling subsided, the precious metal recovered back above $1,700 again and then went on to fresh seven-year highs.
“So for us, we think it [gold] can be a contributor, particularly in portfolios where people are looking for more growth and may not want to add more long-duration bonds...or it’s may not appropriate,” Haworth said. “Gold, in a modest proportion – we tend to think of it in a 1% to 5% sort of range – could be appropriate for certain client situations.”
Those who might be most inclined to want exposure to gold would be more aggressive investors who have fewer bonds in their portfolios, he stated.
“They may be looking for more growth, so gold may fit their [wishes] best, relative to an income-oriented investors who has quite a bit in bonds,” Haworth said. “They may not wish to tolerate that volatility.”