Risks for gold in a high interest rate environment

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Written by Ivan Castano, CME Group

At a glance

  • Gold prices remain high despite rising benchmark interest rates and growing prospects for a strong US economy
  • Joseph Stephens, Head of Trading at MKS PAMP Group, shares his thoughts on gold in an interview with Jin Henning, Managing Director and Global Head of Metals at CME Group.

Joseph Stephens, head of trading at precious metals firm MKS PAMP, says gold will continue to show strength in the face of rising U.S. interest rates, rising hopes for a soft landing and rising geopolitical risks.

While the Federal Reserve’s “long stay high” insistence has pushed prices down, precious metals have remained surprisingly resilient in line with government policies around the world. keep accumulating it amid rising economic and political risks.

“Most assets are influenced by the Fed and its policy in terms of whether they are considering raising rates or aggressively raising rates in the foreseeable future, and gold is no exception.” Stephens said in response to a question from CME Group Global Head Jin Henning. Metals, about how US monetary policy will impact bullion.

His remarks were made as part of the OpenMarkets Idea Exchange Panel. This interview took place after CME Group’s Annual Precious Metals Dinner in New York in September.

Despite rising expectations for benchmark interest rates and a strong U.S. economy, gold prices (which hovered above $1,800 an ounce in early October) have not fallen as much as some had expected. This is likely to be driven by countries’ desire to buy up gold on this basis. about their financial situation. It may be benefiting from concerns over lingering recession risks and geopolitical risks, such as the Russia-Ukraine war and fragile U.S.-China relations.

“Gold is a global investment asset. Economic scenarios vary widely in different countries around the world,” Stephens said. “So while it makes sense to reduce your allocation in the US and North America, the opposite is true in many other countries and it makes sense to add gold to your portfolio.”

Asked what a soft landing or recession in the US would mean for gold, Stephens stressed that strong demand could continue to push prices higher.

“Six months ago, we were at a very dark time in terms of where the United States and other countries were going. Now we are facing a much softer landing that will take away some of the safe haven assets of gold. I predict that,” Stephens said.

“But gold has become more than a safe haven. People buy it for other reasons, such as to diversify from their local currency or to compensate for economic uncertainty in a country or region. So while a soft landing scenario is not necessarily a bullish trigger for gold, I believe it is not as bearish as the majority of the market would have you believe.”

strength of usa

Henning cited the stronger-than-expected U.S. economic performance, which is pushing the dollar higher while Treasury yields remain high, which could impact the prices of gold and other precious metals in the long run. It is emphasized that it is a messy cocktail.

While Stephens agreed that the dollar should remain strong against this backdrop, he feared that rising U.S. government funding costs would hurt the debt situation, which could lead some governments to raise their debt. He pointed out that the government is encouraging people to accumulate gold instead.

“Some countries that have traditionally bought U.S. Treasuries are now diversifying into other things, such as gold,” Stephens said, adding that this trend is a long-term headwind for the U.S. dollar. He added that there is a possibility of financial support. “If you look at the next three, five to seven, 10 years, this could play out in favor of gold.”

What is the biggest risk to gold?

Looking ahead to 2024, Henning asked about the biggest risks precious metals investors should be looking at.

Mr Stephens said that compared to high government bond yields, the short-term outlook “remains challenging, not just for gold but for commodities in general, as it is a zero-yielding asset”, so there is a need to focus on longer-term opportunities. I answered yes.

“It’s a very difficult scenario for commodities in general and gold in particular. But I think this is a short-term phenomenon,” said HSBC, who spent 13 years in a leadership role on the precious metals desk before joining MKS PAMP in 2019. said the same trader.

“We’re seeing that in the two-year and 10-year inversion yields, which are starting to level out but remain inverted. We’re concerned and that uncertainty is what keeps people going for money.”

Risk management is ‘critical’

Amid these challenges, Mr. Stephens said proper risk management became extremely important at MKS PAMP.

“This is very important…especially when you’re talking about short-term risk management, we’re in a binary space. Any headline could move the market up or down by 1% to 4% that day. This makes it very difficult for us and our peers to control the market.”

Rising volatility is driving record demand for CME Group short term gold options contractHenning said this includes covering Monday, Wednesday and Friday expirations. She added that her interest in micro-gold contracts has also increased “hugely” over the past five years.

Much of this growth has come from retail investors turning to safe-haven assets such as gold to diversify their holdings amid looming risks. Asked how this was impacting the market as a whole, Stephens said the phenomenon was being widely felt, with premiums for small-cap gold bars and coins rising to record levels. He pointed out that he was doing so.

“Investors continue to want to allocate their funds to safe havens such as gold due to future uncertainties and currency fluctuations, not only in the dollar but also in the Turkish Lira and Chinese Yuan,” Stefan said. Mr. Su said. “Uncertainty about what is happening around the world, including at home, is driving retail investors into precious metal products.”

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