There are lots of reasons to bet against the gold price rally at the moment but one key reason not to, according to Longview Economics CEO Chris Watling.
Gold prices have recently hovered at seven-year highs after the U.S. killing of Iranian military commander Qasem Soleimani, which spiked tensions between Washington and Tehran in the Middle East and forced investors into traditional safe-haven assets.
Speaking to CNBC’s “Squawk Box Europe” Friday, Watling cited one of the reasons to “short” the precious metal was the beginnings of a cyclical recovery in the global economy.
“What really determines the gold price is typically real interest rates, Fed funds interest rate expectations and things like that, and I think we can price out a cut from the Fed funds curve, I think we’re going to get TIPS (Treasury Inflation Protected Securities) yields moving up this year, and actually it’s quite a consensus ‘long’ now, so all of that is a good reason to sell it,” Watling said. Shorting an asset refers to a trading strategy where investors bet that its price will fall, rather than rise.
Gold is often used as a hedge against inflation, in other words, to protect the decreased purchasing power of a currency resulting from its loss of value due to rising prices.
The U.S. Federal Reserve has halted its cutting cycle, keeping its benchmark overnight lending rate in a range between 1.5% and 1.75% in December and projecting no moves in 2020. The central bank had cut rates three times in 2019.
However, he suggested that the one key reason not to bet against gold prices continuing to climb would be the Fed’s repo program, an ongoing operation to soothe the overnight lending market.
“It is putting a lot of liquidity, a lot of dollar money, into the system, and that is supporting the price,” he added.
Analysts have been broadly bullish on gold of late, with Goldman Sachs expecting a base case for it to trade at $1,600 per troy ounce (toz). Spot gold was trading down around 0.2% at $1,549/toz on Friday after tensions between the U.S. and Iran slightly abated.
However, Goldman’s Global Head of Commodities Research Jeff Currie told CNBC’s “Street Signs” on Friday that with the right combination of circumstances, gold could push even higher through 2020.
“Gold is a hedge against debasement and what we saw in 2011 was debasement, printing too many dollars and the real rate goes down, down, down, which then pushes up the price of gold,” Currie explained, adding that another crucial factor in play on that occasion was a substantial weakening of the dollar, which further propelled gold prices.
“If you do see that, the potential to push gold back up into that $1,800-$1,900 range becomes pretty realistic,” he added.