Will the price of gold rise? Why One Of The World’s Most Successful Hedge Fund Managers Is Sure It Will

Published On: June 24, 2022Categories: Alternative Investments5.8 min read

Historically seen as a safe have asset, the gold price typically rises sharply during periods of economic stress and geopolitical uncertainty. It also tends to do especially well over periods of high inflation and bearish stock market conditions, acting as an inflation-hedged alternative to cash or bonds when holding either means losing purchasing power.

But since big gains between October 2018 and August 2020 when the gold price rose from $1187.2oz to $2032.16oz, a gain of a little over 70%, the precious metal has disappointed.

gold price chart

Source: goldprice.org

The gold price has traded up and down around $1800oz-$2000oz since, occasionally breaking above or below but resisting any significant bull run. It briefly spiked above $2052 in early March but has since fallen back below $1832 despite inflation rates around the world continuing to tick up, interest rate rises, a stock market slump and crystalising fears over a recession.

The gold price should have, according to historical market logic, seen some significant gains over the past three months. But it hasn’t. The question becomes, why not? And will that change? Many analysts believe it will and the gold price will rise in coming months.

But let’s look at the factors that have kept gold trading in a range over the past 2-3 years and why it could be about to break out in an upwards trajectory.

Why has the price of gold recently dropped despite surging inflation, global economic weakness and geopolitical instability?

Over the latter part of 2020 and throughout 2021, gold’s upwards price momentum of the previous two years was halted by booming stock markets. Riskier, high growth companies were having capital flung at them as markets went into melt-up after putting the Covid-19 pandemic sell-off of February to March behind them. When market sentiment is risk-on, gold loses its lustre.

However, since the beginning of this year, market sentiment has become decidedly more risk averse. The high-growth tech-centric Nasdaq 100 index has lost around 30% and the kind of low revenue/no profit tech start-ups recently valued in the billions have seen their 2021 valuations devastated. British online-only second-hand-cars dealer Cazoo, which listed on the NYSE at a $7 billion valuation last August is now worth $705.55 million after losing over 90% of its market capitalisation.

Russia also invaded Ukraine in late February, sparking fears war could spill further into Europe and sending the prices of energy and core food commodities rocketing. That’s an ongoing situation that could still very conceivably get worse again in terms of its threat to European security.

Even at current levels, with the active war relatively contained to the Donbas region, it continues to wreak havoc on the global economy through a combination of disruption to supply lines, Russia’s Black Sea blockade preventing the export of millions of tonnes of grain from Ukraine’s remaining ports, and Western sanctions against Russia. And inflation levels which continue to climb have hit forty-year highs.

But despite the host of factors that would be expected to be in favour of a climbing gold price, it has fallen over 10% in the past three months. Why’s that and can we expect it to change?

The biggest factor behind gold’s recent price decline, and generally sluggish performance over the first quarter of 2022, has been a surging dollar index, which hit a multi-decade peak on June 14. Investors are favouring the U.S. dollar over gold as a safe haven and that’s a trend that many expect to continue with the Fed tightening monetary policy aggressively in an attempt to put a lid on inflation.

dxy chart

Source: TradingView

Rising U.S. Treasury yields as interest rates rise are another factor against a new bull run for gold in the near future. Analysts bearish on gold believe its price could decline over the long term with brokers Capital quoting a forecast from the Australian Bank ANZ that the price per oz could drop to $1600 by 2023.

“Aggressive monetary tightening, rising yields and a stronger dollar are key drags for the gold prices. Rising inflation failed to impress the market, instead raising fears of a more hawkish stance by the central banks. That said, the spread between the fed funds rate and CPI is at its widest, suggesting the Fed is struggling to contain inflation,” analysts at ANZ wrote in their latest gold forecast.”

“Concerns about global economic growth, fuelled by sustained inflation and heightened geopolitical risks, should protect the gold price somewhat. We expect gold to remain supported at USD1,850/oz, with upside potential of USD1,950/oz.”

Could gold prices rise significantly? The bull case

There are also plenty of analysts who paint a positive picture and still expect a bull market for gold to return over the months and years ahead. In the shorter to medium term, The Telegraph’s Richard Evans expects demand from central banks to drive prices back up. He quotes James de Uphaugh of Edinburgh investment trusts, which has a stake in the American gold miner Newmont:

“Simply put, supply is all but certain to fall and demand is likely to rise. The extra demand will come from the central banks of certain countries around the world that have seen how Russia’s dollar holdings have been subject to sanctions and decide to invest instead in an asset that they can keep in their own vaults and has no ‘counterparty’.”

He expects supply to come under pressure over the next ten years because existing mines are running out of economically feasible gold to be mined and there is a lack of enthusiasm and capital for new projects.

“…gold is getting harder to find. If you want to develop a new gold mine it’s not obvious where to go.”

“All the places where gold can be taken from the ground easily have long been exhausted. Whereas once it could be found on the surface, now ever deeper mines are required. Mining companies have also lost their appetite for “prospecting” – searching for entirely new sources – and instead now concentrate on getting all the gold they can out of existing mines.”

“Searching for new mines is the glamorous side of the business and the previous generation of mining executives, their heads no doubt full of images from cowboy films, did just that. They sought to make their company the biggest by spending fortunes on seeking new sources or by buying rivals. This, of course, came at the expense of profitability.”

“Gold miners are now run by people with discipline, who are not gung ho but run their business in a systematised way. They have stricter financial criteria for going ahead with new projects.”

The result is that gold miners are becoming more profitable but fewer new sources of supply are coming online. As a result, production from existing mines is forecast to halve over the next decade and by a third according to the most optimistic estimates.

The Gold price could remain soft medium term but rise longer term

The upshot of the bear and bull cases for gold is that the precious metal’s price may well either hold roughly where it is in the short to near term, continuing the rangebound trend of the past couple of years. A recession could give it a boost.

But unless significant new deposits are discovered and mines invested in, the longer term outlook could favour gold. However, as a short-term safe haven investment amid currently turbulent conditions, the arguments in favour of gold are dubious against the backdrop of such a strong dollar and rising Treasury yields.

About the Author: Jonathan Adams

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