Gold has dropped more than 8% to date. Also, there may not be enough momentum to reverse course this year. But according to Pepperstone’s research lead Chris Weston, this only applies to gold in US dollars. Here are the currencies that should be on your radar.
“Gold held fairly well compared to real interest rates”
Koindeks.com As you follow from , gold retreated from the $ 2,000 level it saw in March. After that, there was a great debate about it as an inflation hedge. However, Chris Weston says that disappointing price action does not mean gold has failed. This has to do with inflation expectations for gold, which is low, with CPI numbers at 40-year highs. Weston makes the following statement regarding the issue:
Gold is a defense against expected inflation rather than actual inflation. The yellow metal held up pretty well compared to real interest rates. People are looking at the wrong type of inflation. It’s more about inflation expectations and breakeven rates. If you look at the five-year breakeven ratios, they hit a high of around 3.76% in March and then came back to 2.43%.
“Golden is a 2023 story”
Using this correlation between gold and breakeven ratios, Weston says that the current value of gold is below $1,600. Weston awaits the top of the US dollar for gold to rise. So not much is about to change until next year when it comes to gold in USD. Weston’s assessment is as follows:
Gold is a 2023 parable. I see signs that the dollar will underperform in 2023. Next year, we will see a weaker dollar that could pave the way for real rates to change slightly. At this point, we will look at gold quite positively.
Is the idea that we will see rate cuts next year realistic?
The first thing markets will watch next year is the Fed’s terminal rate. At the September meeting, Fed officials predicted that the federal funds rate would rise to 4.4% by the end of 2022. They predict that it will rise to 4.6% next year. The Fed has increased rates by 300 bps this year, taking the current range from 3% to 3.25%. Weston says the following on this subject:
Theoretically, we’d like to see this terminal rate drop. If you look at the whole year for next year, we have about 24 bps of cutoff. Still, the Fed has made it clear that they won’t be cutting rates next year.
According to Weston, the idea that we will see rate cuts next year will push the dollar lower and gold higher. The expert explains these views as follows:
If the market gets the idea that we’re in for a disinflationary shock, and if we price a larger element of rate cuts in the second half of next year, that will trigger a very broad dollar market to start depressing some of these positions. It is possible to see a real risk-based rally in stocks to the end of the year. Presumably, gold also follows this trend.
Which currency is the most sufficient to buy gold?
According to Weston, about 90% of people trade gold in US dollars. But if investors want to be more niche, then they should look at buying gold in the weakest currency and shorting it in the strongest currency. This is one of the reasons why gold underperforms in terms of the US dollar relative to some other currencies. “If you make it real, you can maximize the currency effect behind it,” Weston says.
Australian dollar gold is up 6.6% in the last 30 days and 1.24% in the last six months. Pound-denominated gold has risen 2.3% in the last 30 days and has been flat in the previous six months. By comparison, gold in US dollars has lost about 3% in the last 30 days and 15% in the last six months. From this point of view, Weston draws attention to the following issues:
That’s the exchange rate effect there. Gold in Australian dollars has worked incredibly well since Sept. It went from about $2,500 to $2,657. Many of the April and March highs are quickly below $2,700. Pound-denominated gold has made a nice attack since July. In addition, it continues to rise. We’re only pushing £1,531 at the moment. This has to be broken for momentum to continue.
Equity risk remains high. This puts these currencies at further downside risk. “We see that the Australian dollar is still at risk of going into 60 cents,” Weston said. “Sterling also faces greater downside risks as the BoE removes its erratic financial underpinnings.” In the middle, the US dollar remains a much-loved currency. This gives the opportunity to short the gold. Weston shares the following views on the matter:
If I wanted to upstream the gold trade, then I would look at the currencies that we perceive as the weakest. These continue to be the Australian dollar, Kiwi and pound. Also, Japanese yen-denominated bullion would probably work pretty well if we saw the BOJ making noise about re-intervention.