(Kitco News) - While the Federal Reserve’s monetary policy stance will continue to dominate short-term gold price volatility, one market strategist said that there are much bigger long-term patterns investors need to pay attention to.
In an interview with Kitco News Monday, Keith Weiner, CEO of Monetary Metals, said that regardless of when the U.S. central bank begins its easing cycle when it starts, interest rates are headed back to zero, which will be positive for gold.
He explained that the biggest issue for the economy is that interest rates are currently higher than the return on capital.
He noted that the impact higher interest rates have had on commercial real estate, as the sector has lost trillions of dollars in value in the last few years, is just an appetizer in what he sees as a ten-course meal. He explained that there will have to be mass liquidations across all sectors of the economy as businesses adjust to higher costs of capital.
“The Federal Reserve will have to reverse interest rates and put them back to where interest rates are not so far above the return on capital, and that's basically zero,” he said.
Weiner’s comments come ahead of the Federal Reserve’s latest monetary policy decision. The central bank has been vague about the start of its easing cycle as it needs to be confident that inflation is moving back towards its 2% target.
Currently, the central bank is expected to continue to maintain its restrictive monetary policies for the months; however, there are expectations that it will continue to signal three rate cuts this year with the easing cycle starting in June.
With interest rates inevitably going lower, Weiner said he remains bullish on gold through 2024. In his recently published 2024 outlook, he sees gold prices ending the year above $2,300 an ounce, with silver pushing past $26 an ounce.
However, he added that price targets are irrelevant as the precious metals have entered a long-term bull market. Looking past U.S. monetary policy, Weiner said that there are significant long-term factors that will support higher prices.
Weiner said that one of the biggest factors supporting gold is the ongoing de-dollarization trend. He added that this trend is much bigger than the geopolitical lines drawn between allies and opponents.
“Looking around the world, there are a lot of countries that don’t like the U.S. dollar, to put it mildly,” he said. “It’s debatable whether higher interest rates that make dollars scarier brings down inflation. But it certainly tightens the screws on the rest of the world. Nations that are dependent on dollars have now suddenly found it a lot harder to service their debts.”
In a growing multi-polar currency world, Weiner said that gold remains the only alternative to the U.S. dollar.
At the retail level, Weiner said the global gold market remains well supported as consumers buy the precious metal to preserve their wealth and purchasing power as inflation continues to rise.
A resurgence of bullish speculative momentum this past month drove gold prices to record highs above $2,200 an ounce. However, Weiner said that the accurate measure of the market’s strength should be measured in the cash market and the spread between spot and futures prices.
Through most of last year, future prices have traded significantly higher than in the spot market. However, the spread has been narrowing considerably since October 2023 after gold’s sharp selloff to $1,800 an ounce. Even in the latest rally to all-time highs, spot prices have remained in relative lock step with the futures market.
“This is fairly rare and not typical in the gold market,” he said. ‘This is not a speculator’s market, where people are buying futures with leverage while others are selling metal to cash out.”
While most of the physical demand is dominant in Eastern nations, Weiner said that he expects it is only a matter of time before Western investors jump on the bandwagon.
“This will either be resolved by Eastern capitulation or by a resumption of Western appetite. Perhaps the currencies of, e.g., India and Turkey, will stabilize. And perhaps the tooth fairy will put an ounce of gold under your pillow tonight,” he said in his 2024 outlook report.
