![Large Size Player Large Size Player](https://www.moneytalkgo.com/wp-content/themes/electron/views/tdtheme/img//icon-large-player.png)
The price of gold has had a strong run year to date, but a recent slowdown in buying by global central banks is raising questions about the future direction of the precious metal. Bart Melek, Global Head of Commodity Strategy at TD Securities, speaks with MoneyTalk’s Greg Bonnell about the potential headwinds and tailwinds for the metal.
Print Transcript
[AUDIO LOGO] While gold had a strong run through the spring, a slowdown in central bank buying and concerns about whether the Fed is going to cut rates have become headwinds for the yellow metal. Well, our feature guest today says the long-term outlook may still be positive. Joining us now to discuss, Bart Melek, Global Head of Commodity Strategy with TD Securities. Bart, always great to have you on the program. Great to be back. Thank you for inviting me. All right, so let's do a brief history lesson. Now, I actually thought-- I don't know if time is moving slower. It was only in May that we reached those highs in gold. It feels like a million years ago. It was only last month. What took us there, and why are we in this cool-down period? Well, we've had a very good run up to that point. And I would argue that today's levels aren't too bad at all. They're actually quite robust. So what took us there? Well, it was, ironically, we moved higher over the previous few months. We were upwards of $400 to new record highs. And the big factor was central bank buying and physical buying in Asia. Many thought that that was because a lot of Asian investors, in China in particular, were quite worried about their currency. Their economy isn't performing particularly well, and there was concern that easier monetary policy may keep the currency depressed. And we've seen physical buying across the region in central banks. People's Bank of China, up to that point, had 18 consecutive months of purchases. They were on the forefront of physical buying. In fact, central banks have been very aggressive buyers for the last two years. The previous year, in 2022, we had a record. '23, a near record. This year may be a little slower but still very, very robust. It's quite unusual because when the Federal Reserve is raising rates, when interest rates and carry are high and the US dollar is firm, gold doesn't tend to perform very well. It did this time, and that was mainly because of non-North American participation. We saw an absence of ETF buying, and we saw speculative buyers in North America and Europe really not participating in this. So we weren't firing on all cylinders, yet we hit a record. GREG BONNELL: Let's talk about the path ahead. What could reignite this trade into gold? One main thing, in my opinion, is some sort of certainty of when the Federal Reserve starts cutting interest rates. We are back and forth, back and forth, thinking the Fed might get dovish, and then they don't get dovish. They say something hawkish. Then the market pulls back. And then we see data, like we saw the other, I guess, two weeks now, where employment numbers in the United States were still a very strong 272,000, with wage inflation still showing it's not defeated, going up 4.1%. And that precipitated that big drop of over $100 from the peak, along with news that the People's Bank of China may be on the pause in their gold purchases. As we've mentioned, they were on the forefront, driving central bank buying. And now, last month, they bought zero. We were at 72 million ounces, and that didn't change from the previous month. And in confirmation to that, exports or imports from Hong Kong to mainland China were down 30%. So the market concluded, well, interest rates might be higher, higher carry, higher opportunity costs because those yields remain high, the US dollar will likely remain bid. And now, we had slower activity on the physical side from the official sector of the central banks. That dropped us significantly, as I've mentioned, and moved us below, at one point below 2,300. We rallied higher after the CPI numbers came in, showing us that inflation may be under control. And then we had some strong data which brought us down again. [LAUGHTER] A bit of a roller coaster ride, yeah. It's a roller coaster ride, and the ride is determined by where the economy is going, which the market perceives will drive Federal Reserve monetary policy. So right now, I think it's very much about monetary policy. So we a little uncertain about the monetary policy, what we're actually going to get from the Fed this year, one or maybe not at all. On the China buying, did they pause simply because the vaults are full? I mean, has their appetite been sated, or could they actually return to the market? Well, it's difficult to say. Anything I say here or anywhere else is pure speculation on my part. But I will propose this, that they only have 5.1% of their massive $3.2 trillion reserve in the form of gold-- very, very little compared to the United States, which is, I think, 72%, Germany, which is also in the 70s, Russia over 25%. So when you compare China's reserves and when you compare it to everything else, first, it's much bigger. And second, it has much less gold in relative terms than, I would argue, their geopolitical competitors. And it looks like, to me, that central banks, broadly-- not, of course, only People's Bank of China-- are worried about two things. They're worried about geopolitics. Well, we know that the tensions in the South China Sea have been rising. And I've been writing about this for a while. I've wrote a piece recently on the impact of US elections on commodities which included gold. If Trump wins, we probably get more adversarial relationships, higher deficits. Or central banks are thinking, well, if we get into it with the United States, possibly, rhetoric surrounding Taiwan may grow, issues might pop up in the South China Sea. And that leaves us with the possibility that-- we're not predicting this, but the risks are rising that there could be some sort of a sanction regime against non-Western countries who may be affiliated with the other side, to speak. So if you are primarily US dollar oriented and euro in your reserves, you may want to diversify that. We know Russia's experience was quite negative, where a good portion, half of their reserves and currency, were basically blocked and they couldn't use them. And now, of course, as I think your audience has heard and you've heard, there is talk of using those reserves to rebuild Ukraine, probably without the permission of Russia. So if that's a risk, then countries that could potentially have a problem down the road-- I'm not saying they will, but you calculate the risks-- may want to hold less of those fiat currencies that could be blocked and maybe substitute that with gold. And in fact, we've seen that happen all over the place. And for other reasons, nongeopolitical reasons, the US has a $35 trillion debt. GREG BONNELL: Oh, that's your gold as an inflation hedge, right? I mean-- BART MELEK: Yes. Even heading into a presidential election in the fall, from what I hear, both sides are still going to be spending a lot. The debt is going to be big. Right. You know, the Congressional Budget Office, I think, is predicting something like $1.8 trillion deficit. I don't know what it's going to be next year, but I think most consensus and the budgetary office is saying $1.6, $1.8 trillion on top of the trillions we already have. And the concern here is that, over the long run, as the population ages and you're going to have to spend on Medicaid, Medicare, on pensions for retirees, which, I think, to a great extent, is not funded, means that you're going to have massive expenditures. And as far as I know, the appetite to pay higher taxes in the United States is nonexistent. People don't tend to like paying taxes. They do like their services-- GREG BONNELL: And voting for candidates who proposed raising taxes, yeah. [LAUGHS] And so we're probably going to see high deficits and higher debt levels for the next 30 years or so. And how do you pay for it? Well, the concern is that you might very well use the monetary tools or monetization to pay for it. And that probably means above-trend inflation. And that's usually a good thing for gold. [AUDIO LOGO]
[MUSIC PLAYING]
[MUSIC PLAYING]