Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about the gold market with Onno Rutten, portfolio manager and vice president, investment management, with Mackenzie Investments. We talked about gold ETFs, equities and bullion, China’s gold-buying spree, and we started by asking what explains the recent rise in gold prices.
Onno Rutten (OR): Gold can take on different aspects over time. For the past decade or two, the price of gold was very much related to real interest rates, which really drive the opportunity cost of holding gold. And right now, real rates are quite high. But gold broke away from that trend [over] the past two years, and we see today a very strong gold price, despite that lack of interest from western-world investors. And what really is driving it is the interest of central banks of countries that feel a bit challenged in this world. You can actually pick it up right onto the day when the western world put sanctions on the Russian banks, following the invasion of Ukraine, because what that 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. And since early 2022, we see a very strong bid for physical bullion out of countries such as China, but also Kazakhstan, Libya, other countries that might feel nervous in this new world system that we’re experiencing.
Gold ETFs
OR: The flows in gold bullion ETFs tell you a lot about the interest from western-world investors. And they’ve been net sellers. Those physical flows are going straight to Shanghai. They pay maybe $20 [to] $50 an ounce premium over western world’s prices. The real question that we have to ask ourselves is, why are we selling off our gold? Should we not have some bullion in a world where the whole system as we knew it — of open markets — is in full reverse? Maybe the western-world investor should start realizing that gold can play a role in a portfolio, to diversify and to insure yourself against these big forces that are at work.
Politics and the gold standard
OR: The big trend here is deglobalization and onshoring. This is a big trend that’s going to last for a long while. And fascinatingly enough, we see it actually in the data. The amount of investment in U.S. manufacturing is off scale. It’s not something we’ve seen for the past decades. Does gold play a role in countries trying to break away from the U.S. dollar? At the margin, yes. That’s why the price has jumped $300 an ounce.
The performance of gold equities
OR: Gold prices rose very sharply as soon as the global pandemic was declared. But the gold producers ran into operational issues. One, they ran into labour issues that affected the production of gold. And that, then, by consequence, affected the equities, because production was heavily disappointing. And secondly, those mines, they use a lot of the inputs where the inflation has happened. So the miners saw a lot of cost pressure, and they saw labour pressure. The labour pressure is abating because labour is moving freely again. The cost pressures are also somewhat stabilizing. So the opportunity for the gold equities is this year to have their revenues up by $300 an ounce but their costs actually only creeping up $50 (or) $100 an ounce. And that’s where we would see this to be the year where the margin is once again expanding. We could actually see the equities performing quite well going forward.
Gold and the global economy.
OR: Gold would actually be a benefit very much from the economy moderating to a degree that inflation comes under control, because that’s the moment when real rates start topping out or even declining. Declining real rates have been the best predictor of gold prices. Imagine a world where China is systematically buying physical bullion and now you put, on top of that, a renewed interest for gold from western investors as real rates start to moderate. Now you have two buyers. That would be the perfect recipe for a substantial bull market in gold.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Onno Rutten of Mackenzie Investments. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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