The U.S. Federal Reserve is widely expected to lower interest rates at either the May or June meeting. Daniel Ghali, Senior Commodity Strategist with TD Securities, tells MoneyTalk’s Greg Bonnell why he thinks many investors may be under-positione…
While the US Federal Reserve has preached patience when it comes to rate Cuts our feature guest today says that investors may be historically underp positioned for the moves that gold might make when those cuts arrive joining us now to discuss is Daniel gley senior commodity strategist with TD Securities
Dan great to have you back on the program yeah thanks for having me so this is the year that we entered a waiting raate cuts the thought is they still will come even though we need to be a little bit patient as we were saying but what about gold what what
Does it all mean for gold what are you seeing in the market well listen the the start of the timing of a rate cutting cycle is less relevant for gold than the total number of cuts uh on the horizon that we could expect what’s interesting in the gold market is that today
Investors are historically underp positioned for a Fed cutting cycle and why wouldn’t they be if you think about the last few years uh macro Traders in particular in Gold have been repeatedly wrong-footed the types of indicators that they look like things that we’ve discussed before for like real rates or
The broad US dollar have led them astray time and time again um what’s interesting though is that despite the fact that these macr Traders are under position that in fact after the strong series of um growth data in particular in the US they’ve built up a sizable net
Short position uh gold pric are still near all-time highs so what gives right and um the answer to that is actually uh from physical markets right if you look at the relationship between gold and real rate over a very long-term Horizon that relationship is fairly stable but there
Are moments in time um where large changes in real rates don’t really have much of an impact on gold the last time that’s happening today and the last time this happened was in the early 2000s which is an era where physical uh markets were larger or larger um forces
Than financial markets in in gold and um that’s really the the reason why gold prices haven’t sold off even though uh macr Traders are are shorting it so macr Traders shorting under positioned in terms of what could happen from the FED when we do get to the point that we do
See some rate cuts from the fed and I think at TD Securities you know the thinking still is you’re going to probably get some Cuts uh by the summer Robert both was on earlier this week what does it start meaning for gold what could it do to the price of gold and
What could it do to the trade would everyone start sort of rushing into that trade well certainly historically you see very large amount of capital that starts to move into gold and the reasoning behind that is very simple the cost of carrying gold uh in this moment
In time is actually quite elevated and that relates to the cost of funding your long gold position the US dollar uh interest rate is quite high so that keeps people from buying gold as that rate comes down it makes it easier um and reduces that opportunity cost for
Folks to start buying gold uh what we would expect though and and we do think the FED is going to cut rates for the first time in May and uh in fact we have May really absolutely yes and um our our forecasts are actually for a deeper fed
Cutting cycle than the market is currently pricing in because we still expect a meaningful slowdown and growth even though we’re no longer anticipating a recession in 2024 in the US uh we are expecting growth to slow more materially than the market thinks and that should be accompanied with a more um meaningful
Fed cut uh um on more meaningful fed cuts on the horizon so right now on my screen I have an ounce of gold at 231 bucks if the thesa starts to play out the FED starts cutting rates they go deeper as you said perhaps in the Market’s anticipating do we have a
Substantial upside for gold here uh we think so we think gold prices can trade on an average quarterly basis high as 2250 by the second uh quarter of this year um and really that’s on the back of the strong physical Market activity that we’ve seen uh but also this Rush of
Capital from the investor side which has really been the missing piece for goal to sustain new all-time highs for the time being is the biggest threat to that thesis simply that inflation in the states it seems that we’re getting our headline inflation down and Canada and our core inflation down last print from
Uh the US side was a little bit sticky is that the biggest threat to the thesis right now for gold that inflation doesn’t behave from the macro side absolutely but what’s interesting is again macro Traders now are net short in Gold they’ve already taken taken positions that are consistent with that view um
The other side of the equation the physical markets is really what’s interesting here right the the um exceptionally strong demand that we’ve seen so far this year out of China isn’t just associated with the Lunar New Year celebrations that tends to be you know the seasonal peak in Chinese buying
Activity but we’re seeing that buying continue and persist um beyond that Horizon we also know in India there’s been a very substantial amount of purchases of um of um precious metals more broadly and that’s this the same case in many parts of the world including the Middle East and turkey as
Well um so these flows are are now larger than the downside pressure that we might see from macr Traders from stickier inflation than expected all right want to talk about silver now and fairly or not sometimes referred to I believe as the poor man’s goal but you’re noticing interesting things in
This market too absolutely so so far this year Silver’s pretty uh dramatically underperformed gold um that is you know consistent with the mackerel story we’ve been discussing but when you start to look on the horizon there’s a few uh very large assumptions that are being taken for granted in the market
That we think could be challenged the first is that you know one of the large assumptions in silver markets is that um you will always have silver that is available right this is um a metal that is very intensively used in industrial capacity um solar is increasingly the largest structural driver of demand
Growth for silver and we expect that to continue on the horizon most um Market forecasters out there expect the structural deficit on the horizon so uh I think that begs the question is there a moment in time where the very large amount of silver inventories that have accumulated over the last several
Decades are going to be W down and how will that by by the strong um industrial demand and particularly from the solar complex and um if that does hurt happen um how will we incentivize investors to sell their physical silver Holdings in order to satisfy physical market demand
I was thinking too how do you incentivize miners to take more silver out of the ground I mean it’s an interesting time in the fact that we looked to a lot of metals that we’re going to need for different kind of transitions I think we’ll talk about
That later uh but then are we mining enough of it I mean if if we end up with a structural deficit of silver it has industrial purposes as you said and we need more of the stuff are the miners going to put the money in to take it out
Of the ground well interestingly silver is very traditionally used or mined as a byproduct of other metals right so it’s a byproduct of zinc mines lead mines um gold mines and so on and so forth uh so there is a very you know well- discussed theme that of structural underinvestment
In mining activity that’s been the case for the past 12 years at least and that is now having an impact on Silver right the difference in silver markets this is appreciated uh this this theme is appreciated in other base Metals markets for copper we’ve spoken about it before
For instance but the difference in silver markets is that the there is that assumption that there will always be silver available given that don’t worry about it it’s always coming out of the ground when we pull other things out of the ground right well I think people expect no nobody’s throwing away their
Silver right the it’s every ounce of silver that has been mined for a very very long time still exists somewhere in some form uh the question is how much of it is actually freely available for purchase and when we crunch the numbers we we find a significant portion of it
Is actually not available for purchase or at least not at current prices
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Please include some charts like CNBC