r/investing
Hot Take: Gold may underperform in the next few months but is poised to up in the next few years.
Gold faces short-term headwinds from high rates and central banks' forex depletion, but remains a strong long-term reserve asset.
- Central banks have accelerated gold accumulation to 1000t annually over the past four years amid geopolitical uncertainty.
- Long-term central bank demand is expected to rebound once energy-importing nations recover from the current energy crisis.
- Gold recently experienced an overextended rally and subsequent correction, with central banks currently lacking forex to buy more.
- Hawkish monetary policy expectations, driven by figures like Kevin Warsh, mean higher interest rates will act as a headwind for non-yielding gold.
Hot Take: Gold may underperform in the next few months but is poised to up in the next few years.
Gold has come down significantly from its peak of 5500 earlier this year now trading at around 4100. First off the decline was warranted. Gold ran up WAY too much before the start of Iran war. For an asset class worth close to $25 trillion to rally $1000 in two weeks(happened in January) is an indication of an over extended trade. Having said that futures market isn’t the full picture and hold demand is largely driven by central banks who buy gold as a reserve asset.
Talking of reserve assets in my assesment in addition to being over bought the reason for sluggish gold performance is also that central banks simply don’t have extra money to buy reserves right now. Biggest buyers of gold, China, India, Poland, Turkey, etc are all energy importers and are naturally focused on energy supply than reserves right now.
So, most countries are struggling with energy crisis and depleting their forex reserves to buy energy. As that changes gold demand might pick up again.
As per WGC, “Central banks have accumulated an average of 1,000t of gold over the past four years, up significantly from the 500t average over the preceding decade.**1** This marked acceleration in the pace of accumulation has occurred against a backdrop of geopolitical and economic uncertainty, which has clouded the outlook for reserve managers.”
Another central bank factor is Kevin Warsh. Gold reacted violently to the downside during Kevin Warsh’s Congress testimony and then again on the first fed meeting. Warsh at least according to his writing and commentary is a major hawk for meaning he will keep interest rates higher. For a non yielding asset like gold high interest rates/yields are a major intermediate headwind.
However, my view is that one central bank buying won’t be effected significantly by this over the long term and two, due to the large US deficit and debt keeping interest rates higher is not feasible as a higher interest rate means a higher deficit as US government needs to pay more in interest.
Next, inflation has been remarkably sticky since 2020, 6 years after the pandemic we are still seeing 4% inflation and deficit around 5-6% it is clear that Fiat is losing value. Gold a physical asset grows in supply by less than 2% a year making it a a decent option for those looking to maintain their purchasing power.
Based on these factors IMHO gold is a good long term investment, if the fed raises rates it might go down temporarily but due to macro factors discussed above it’s bound to go up in dollar terms.