(Kitco News) - The Federal Reserve’s reluctance to cut interest rates as inflation fears remain is creating some volatility in the precious metals market; however, gold’s growing utility as a monetary asset continues to provide long-term support for prices, according to one fund manager.
In an interview with Kitco News Wednesday, Steve Land, lead portfolio manager of Franklin Templeton’s Franklin Gold and Precious Metals Fund, said that while he doesn’t see the world going back to a gold standard or the U.S. dollar losing its reserve currency status, he does see growing use of gold to settle international trade.
“When you look at how much of the world is getting segregated from the U.S., if you want to buy cheap oil from Russia, it makes sense to use some gold to facilitate that trade,” he said. “I think it makes sense for governments to hold more gold as the world becomes more insular.”
Central banks worldwide continue to buy gold at an unprecedented pace, and this demand has dominated the marketplace since 2022. Official sector demand has risen by more than 2000 tonnes in the last two years.
However, Land said this official sector demand only explains part of gold’s recent rally. He added that he suspects there is a lot of international buying that is going unreported.
“I'm not saying that the U.S. dollar is being displaced as a global currency, but, at the margin, there could be a portion of global trade occurring in gold as well, which is a little bit harder to track,” he said.
Land said that this new utility for gold would explain why the gold market has seen a significant increase in over-the-counter gold demand, which can be opaque and difficult to trace. Last month, the World Gold Council released its first quarter Gold Demand Trends report, saying that, including over-the-counter purchases, global physical gold demand rose to 1,238 tonnes, an increase of 3% from the first quarter of 2023. Excluding the OTC market, the WGC said that gold demand dropped by 5% to 1,102 tonnes due to continued outflows in gold-backed exchange-traded funds.
Land said that he suspects undocumented government demand is a significant factor behind the OTC purchases.
“It's hard to reconcile the idea that there's all these investors out there who want to get exposure through the gold on the OTC when there's very low-cost ETFs available,” he said. “We can clearly see that investors are not interested in gold-backed ETFs at the moment. This OTC demand feels like gold is playing a bigger role in global financial markets than what we have seen in the past.”
Land added that gold’s renewed role as a monetary metal should create a stable uptrend in prices.
Although Western investment demand has historically been the most significant factor dominating the price action, Land said this also has disadvantages. He pointed out that investors can be very fickle, and sentiment for an asset can change quickly.
He pointed out that ETF investors were very quick to sell their gold as momentum waned in 2011. He added that prices took nearly a decade to recover from the decline due to ETF selling.
“Anyone who has been investing in markets for the last 15 years hasn’t had good experiences with extended gold moves,” he said. “If you go back, you can see there has been a lot of risk and volatility in the gold market.”
At the same time, with short-term money market funds offering significant yields and the S&P in a strong uptrend, Land said it is not surprising that investors have largely ignored the current gold rally.
“This momentum in gold has been fairly recent, and it has competed against a lot of other attractive products,” he said.
Although gold has seen significant gains in recent months, Land said he suspects there are still opportunities for investors.
“The market is very different from what we have seen in the past,” he said. “If gold continues playing a larger and larger role in global trade, then there's a case where you could see prices continuing to move higher.”
Land also pointed out that investors who missed the gold trade should pay close attention to mining equities. The sector saw robust earnings in the first quarter of this year, and Land said that with prices even higher, margins could be even better in the second quarter.
“With the rally in gold, there is no question that the miners are trading at cheaper valuations than they were before. Although the stocks have run up, they're still trading at lower valuations than they were a year ago, using spot prices that they're currently realizing,” he said. “In this price environment, you're going to see a lot of cash building on the balance sheets of producers. This does create a real opportunity.”
