(Kitco News) – Gold is performing more like a growth asset than a safe haven, and this only adds to the traditional investment case for the yellow metal, according to Sadiq Adatia, Chief Investment Officer at BMO Global Asset Management.
“Gold is not behaving like it traditionally does,” Adatia said in an interview published on June 22. “Normally it’s an inflation hedge, a hedge against the US dollar, and it normally reacts to yield.”
“What we saw in the first half of the year was that gold was strong and so was the US dollar, it moved up even when there was no risk aversion,” he added. “People are holding it for many different reasons, not just traditional reasons. Sovereign wealth companies and countries are buying gold as another store of value for other currencies.”
Indeed, gold has actually outperformed the S&P 500 over the past six months, even as stock markets have set successive all-time highs amid their recent bull run, with the yellow metal gaining 20% while the S&P rose 18%.
Adatia said there are a number of factors propelling gold to new heights, including lingering fears about a potential recession, central bank buying, and an rising interest from sovereign wealth funds.
“You’re also seeing consumers buying more gold, if you recall Costco sold out of gold bars in the US this year,” he said. “At the same time, people are holding it for normal reasons, because they’re worried about downturns in the economy or consumer weakness.”
“There are so many different reasons people are holding gold, which has increased the opportunity dramatically.”
Adatia said that this may be “the least loved bull market that we’ve seen” in equity markets owing to its top-heavy gains for the so-called ‘magnificent seven’ at the expense of the broader index.
That said, he doesn’t expect gold to continue to outgain the S&P 500, citing the two-month pause in gold purchases by the People’s Bank of China and moderating inflation data in the US and Canada.
“I think people should hold gold for the normal reasons why they want to own gold,” Adatia says. “Protection against market volatility, inflation, and the US Dollar.”
“Those are the reasons you want to own gold,” he concluded. “Everything else is gravy.”
In late June, commodity analysts at BMO Capital Markets raised their price forecasts for gold by 5% across the board, as they don’t expect the precious metal to drop below $2,000 an ounce in the next four years.
In the nearer term, the Canadian bank sees gold prices averaging around $2,263 an ounce this year, up 4% from their previous average estimate of $2,168. Looking to 2025, BMO sees gold prices averaging around $2,200 an ounce, up 5% from the previous estimate of $2,100 an ounce.
Although gold is expected to remain range-bound through the third quarter, BMO is looking for higher prices by year-end, with an average Q4 estimate of $2,350 an ounce.
The analysts said that central bank gold demand continues to transform the precious metal investment landscape and is a key factor for why it has largely ignored higher interest rates due to the Federal Reserve’s aggressive monetary policy.
“Perhaps the most important element of this is that the incremental gold buyer has moved from a price-sensitive consumer to an AUM-sensitive asset allocator, to a mandate-driven central bank,” the analysts said. “This shift has, in our view, been a key reason in gold trading at a consistent premium to the cost curve over the past few years. Moreover, China’s push to de-dollarize trade is pulling gold back into the global monetary system, something we view as a secular trend over the next decade.”
