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Expected declines in inflation and real interest rates could lead to a dramatic increase in demand for gold, says Onno Rutten, vice-president, investment management, with Mackenzie Investments.
The portfolio manager with the Mackenzie Resource Team said demand for gold from investors in developed economies has stalled over the past two years as the opportunity cost of holding the precious metal increased. Western investors have turned to inflation-protected bonds and money market accounts, and have been net sellers of gold.
But as economic conditions start to improve, the rebound for gold — in the form of ETFs, bullion and equities — could be dramatic.
“Gold would actually benefit very much from the economy moderating to a degree that inflation comes under control,” he said, “because that’s the moment when real rates start topping out or even decline.”
And that’s not the only factor that could lead to a gold rush.
Rutten said the price of gold has been propped up by demand from developing economies that have been buying bullion as a hedge against foreign reserves devaluation ever since western sanctions on Russia kicked in over the invasion of Ukraine.
“What [those sanctions] highlighted to other countries is that your foreign reserves can be taken away just like that, and you can be excluded from the financial system,” he said. “Since early 2022, we’ve seen a very strong bid for physical bullion out of countries such as China, Kazakhstan, Libya, and others that might feel nervous in this new world system that we’re experiencing.”
If western investors return to gold, the price could rise dramatically.
“Imagine a world where we superimpose western-world reinvigorated demand for gold, on top of the structural buying by central banks in other parts of the world. That would be the perfect recipe for a substantial bull market in gold.”
As for gold equities, Rutten said prices have been depressed since 2000 when the pandemic upset supply chains, inflation drove costs up and labour markets tightened up. Now, with labour pressures abating and costs stabilizing, he sees opportunity for gold producers like Toronto-based Agnico Eagle Mines Ltd., Vancouver-based Lundin Gold, and two South Africa-based companies: Gold Fields Ltd. and AngloGold Ashanti Ltd.
“These equities are like a coiled spring,” he said. “We believe the worst is behind us there.”
According to Rutten, operating margins could open up as early as this year.
“The market right now is waiting to see some evidence. If margins do expand, we expect the equities actually to outperform gold bullion,” he said. “So, we would definitely steer the investor to have bullion as a diversifier in their portfolios, and to take advantage of the investment opportunity in gold equities.”
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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.
This article is part of the Soundbites program, sponsored by Canada Life.
The article was written without sponsor input.