Upside risk the economy creating headwinds for gold price - USBWM's Haworth
(Kitco News) - The gold market is seeing some renewed momentum as inflation pressures push higher; however, one fund manager warned that the precious metal could struggle through the rest of the year as economic activity picks up.
Rob Haworth, a senior investment strategist at U.S Bank Wealth Management, said that he is negative on gold through 2021 as the U.S. and global economies are expected to see the best growth in decades. He added that investors should be looking at implementing more aggressive strategies in their portfolio.
"We'd look to the offensive side of the ledger here. And I think the challenge for gold," he said. "We see upside risks for the economy and that will push inflation and real interest rates higher and those will be headwinds for gold."
Haworth said that the current price above $1,700 an ounce probably represents fair value for gold. He added that he expects to see lower prices long term.
Although equity markets are trading near record valuations, Haworth said that markets can still go higher.
"This is not a market that's going up just by sheer will alone. Equities are being driven higher by earnings and by fundamentals," he said.
Last week the International Monetary Fund increased its growth forecast for 2021. It now sees the U.S. economy growing 6.4% this year; the global economy is expected to grow 6%. Haworth said that these estimates are relatively in line with USBWM expectations.
There is still a lot of uncertainty surrounding the long-term impact the COVID-19 pandemic will have on economic activity, helping to stabilize gold above $1,700 an ounce. However, Haworth said that he is focused more on the growing pent-up potential that could be unleashed when economies start to open up.
"There is still a lot of work that needs to be done before the economy has fully recovered, but attitudes appear to be constructive," he said.
Haworth added that the most significant risk he sees in the market is that strong economic growth and rising inflation forces the Federal Reserve to tighten monetary policy sooner than expected. However, he also noted this could be a low risk given the dovish comments and forecasts recently presented by the central bank.
"The Federal Reserve is not going to be taking the punchbowl away until most consumers are back to work," he said.
Instead of looking at gold, Haworth said that his firm is using real estate and Real Estate Investment Trusts (REITs) to balance the risks in its portfolios.
"We're leaning on other cash-flowing asset classes for those defensive characteristics in our portfolios," he said. "We're trying to pick up yield wherever we can and that for us crowds out defensive investments like gold in favor of things to pay us some cash flow."
However, for investors who are looking for exposure to commodities, Haworth said that he would look at base metal producers. This year metals like copper, aluminum and tin have pushed to multi-year highs.
"We think the commodity producers do okay in this environment because, with the reopening story, there is an upward bias to commodity prices," he said. "That should benefit the producers and the cash flows."