Make Kitco Your Homepage

Central banks are buying gold to protect against the threat of a sovereign debt crisis - Equinox Partners

Kitco News

Editor's Note: With so much market volatility, stay on top of daily news! Get caught up in minutes with our speedy summary of today's must-read news and expert opinions. Sign up here!

(Kitco News) - Inflation at a 40-year high and rising interest rates worldwide are creating a lot of stress in financial markets and pushing the global economy into a recession and potentially creating a sovereign debt crisis. According to one fund manager, the macroeconomic backdrop is creating a perfect storm for gold prices and gold mining stocks.

In an interview with Kitco News, Sean Fieler, president and chief investment officer of Equinox Partners, said that he expects it will be only a matter of time before gold prices increase as economic risks continue to grow. The investment firm is a leading long-term value investor with over $700m in assets under management.

"Looking at financial markets, the kindling is set, and you just need one little spark to ignite the fire," he said.

The comments come as rising geopolitical risks have increased safe-haven demand for gold, pushing prices to $1,800 an ounce. Fieler said that the next leg in the gold rally will be when the Federal Reserve starts to pivot on interest rates.

He added that the U.S. central bank has been aggressively tightening its monetary policy because it has been so far behind the curve. He said that he doesn't expect the Federal Reserve will be able to get inflation under control and that as the U.S. economy continues to weaken, it will be forced to abandon its current tightening cycle.

"I'm expecting the Federal Reserve to pivot in the second half of the year," he said.

But it's not just a recession that investors have to worry about. Rising interest rates mean nations that have flooded unprecedented amounts of liquidity into financial markets in the last two years now face higher servicing costs. Fieler noted that emerging markets are already experiencing a debt crisis.

"The IMF, back in the early part of the summer, declared that the developed world sovereign debt crisis is not here yet, which was ominous," he said.

Fieler said that in this environment, he expects central banks to continue to add to their gold reserves and may even increase the pace of purchases through the rest of the year.

Geopolitical uncertainty has quietly supported gold prices, but now the volume has been turned up

The largest factor in the gold market is actually central bank participation in the market," he said. "In a recent survey, you saw a number of countries preannounce their intention to buy gold. Central banks are eager to preposition themselves for a world where the dollar is not the world's only reserve currency. Gold seems to figure prominently in that calculation."

Last week the World Gold Council noted that central banks bought 59 tonnes of gold in June. For the first half of this year, central banks purchased 270 tonnes of gold. The WGC noted that central banks bought 180 tonnes of gold in the second quarter.

"This is a continuation of the strong buying that we saw last year and we now expect full-year central bank demand for 2022 to be on a par with 2021 levels," the WGC said in a recent commentary.

Fieler added that when the world's largest purchasers of gold continue to buy, the price will have to go up.

As gold continues to push higher, Fieler also expects gold miners to see their valuations improve. He added that mining equities are waiting for a new rally in the gold market and are poised to break out.

He added that current valuations are extremely attractive.

"You can buy producers with low, all-in sustaining cash costs, attractive cash flow, rock, solid balance sheets," he said. "Dundee Precious Metals would be a good example of a company that's going to have more than half of its market cap in net cash by the end of this year. Endeavour Mining is a top 10 producer that's returning 5% of, Its market cap through dividends and share buybacks this year. The math is very attractive."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.