Gold still looks good, but copper and oil look better - USBWM
(Kitco News) - With equity markets back at record valuations and bond yields holding above 1.5%, investors appear to be pricing in perfection when it comes to a robust economic recovery. However, according to one market strategist, this could be good for gold.
In a recent telephone interview with Kitco News, Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, said that there is a lot of optimism in the marketplace due to expectations of a faster-than-expected economic recovery. However, if there are any issues with the continued rollout of vaccines or hiccups with economic activity, that sentiment could quickly sour and drive gold prices higher.
"Market expectations are that by September, the economy will reopen, and inflation takes off," said Haworth. "I think there's still enough skepticism in that narrative. The Fed may have to react to these higher real rates and tightening financial conditions. That could be the thing that the shore is up gold prices."
The comments come as gold prices push above $1,700 an ounce after bouncing off Monday's 10-month lows. The rally comes as 10-year bond yields trade at a session low of 1.53%. April gold futures last traded at $1,711.20 an ounce, up nearly 2% on the day.
Although gold prices have room to move higher in the near-term, Haworth said that gold prices are only slightly below fair value by his firm's estimates, so gains could be limited through the rest of 2021.
While gold prices continue to look attractive as a long-term investment, Haworth said that in the near term, they are looking at more cyclical assets like base metals and oil as a better near-term inflation hedge.
"We'd prefer the energy and probably more cash flowing companies in the energy," he said.
Copper and oil have both been attractive plays so far in 2021. Copper prices are holding near last month's nearly 10-year highs above $4 a pound. Just this week, oil prices pushed to a three-year high hitting $70 a barrel due to growing demand and geopolitical uncertainty constraining supply.
Economists expect copper will continue to do well through 2021 as the reopening of the global economy, further development of renewable energy, and the growing demand for electric vehicles drive demand. At the same time, supply is expected to remain constrained with falling mine production.
"The type of inflation we can see in the back half of the year. If it surprises higher, it is going to be driven by cyclical demand. From a commodity investor perspective, I think that implies there's, there's more upside in cyclical commodities or oil."
Haworth said that the gold market depends on how the Federal Reserve will react to current market conditions. He added that bond yields have room to move higher before the central bank would be forced to step in.
At the same time, Haworth said that ultimately for gold prices to really shine, consumer prices have to rise uncontrollably, similar to what happened in 1970, when inflation rose to double digits. He added that while inflation is likely to increase this year, he doesn't see the scenario playing out as it did five decades ago.
"Money has to be chasing goods persistently, and I don't see that mechanism yet," he said.
Haworth noted one factor why there are no persistent inflation pressures - wages aren't increasing. He said that back in the 1970s, as prices went up, so did the wages; however, in today's economy, he said wages aren't rising at the same pace as prices; this causes demand to eventually contract, dragging prices lower.
"Gold is often thought of as an inflation hedge, but in the shorter-term time frames, there is a higher correlation with cyclical commodities," he said.