Below is the View On Gold by Mr. Chirag Mehta Senior Fund Manager - Alternative Investments Quantum Gold Fund, Quantum Gold Savings Fund, Quantum Multi Asset Fund & Quantum Equity Fund of Funds
Gold has been negative for six straight months now. Last time when gold had such consecutive monthly losses was all the way back in 1997; this tells how hard gold’s been hit. A combination of rising U.S interest rates, a strong dollar and a hawkish Fed has been a perfect recipe for gold’s dire state. However, a bruising trade conflict between the U.S. and China has failed to revive demand for gold in a big way but has lent enough support for gold to cling to the $1200 an ounce levels. Gold prices decline by -0.7% for the month of September, taking the year to date losses to -8.5%. There are plenty of loose strings impacting the global macro environment right from trade wars, Brexit uncertainty, Italian crisis to the U.S midterm elections. With most of the negatives to a large extent priced in, any of these triggers can boost gold prices.
Fed hiked rate by much anticipated 0.25% but more importantly, it laid the groundwork for one more rate hike this year. Markets predict about 77% probability that there will be one last rate hike for this year in December. While the financial markets had factored the September rate hike, it was a more hawkish demeanor that reignited selling pressure in gold as it has created strong tailwinds taking the U.S. dollar higher. Fed Chairman Powell spoke about the unique and sensitive balance act that the Federal Reserve must adhere to in order to allow economic growth to continue while not letting the current economic expansion overheat. However, it’s easier said than done. History suggests that the central bank has accomplished this balance only once in its 104-years of operations i.e. deliberating a soft landing i.e. Prevent overheating by raising rates but not so much that they trigger a recession.
Trump intensified an ongoing trade war by rolling out 10% tariffs on $200 bn worth of Chinese exports to the U.S., while threatening levies on another $267 bn of Chinese goods. China retaliated with tariffs on another $60 bn. Even though American companies have complained that such moves will raise business costs and eventually consumer costs, this will be the second time the U.S. places duties on Chinese goods. At one end, trade tensions are good for gold. Whereas on the other end, it could boost inflation more than desired by Federal Reserve policymakers, who might feel the need to raise rates more aggressively than planned.
Markets base case still remains that Trump is simply using trade tactics to secure a better deal with Beijing and at some point will make a u-turn, strike a deal and register a political win before the mid-term elections.
However, Investors are reluctant to appreciate that China will not let down and is gearing up for a prolonged period of trade friction, and dismissing optionality around potential macroeconomic shocks. If the posturing is for real and we do not see a deal, it will have profound implications which should not be underestimated as it will require a rethink on trade, investments and globalization as we know it today and have profound impact on global growth, inflation and currencies.
The U.S. midterm elections could play a big part in shaping the outlook for gold. In the contests, control of the House of Representatives and Senate are up for grabs. Should Democrats regain majorities; that could put them in a position to step up scrutiny of Trump’s administration and might raise the likelihood of Congressional gridlock that slows the president’s policy initiatives? The polls are still indicating the Democrats winning back the House of Representatives. But it looks like a close race and turnout will be critical. The major risk for Trump is losing both the US congress and senate to the democrats, and if that happened he would face tremendous pressure to do something to remedy the growing isolation of America’s government in the world government community.
Although the headline level for the U.S. business cycle looks healthy thanks to Trump tax cuts, there are some concerns over credit stress, making it questionable whether the U.S. consumer can withstand materially higher interest rates. The Fed’s reverse QE program, along with its eight rate hikes is putting pressure on the most interest rate sensitive parts of the U.S. economy. For example, the housing market is cooling. Existing Home Sales, which makes a large chunk of the housing market, has dropped 4 months in a row and are down 1.5% year-on-year. In addition, Pending Home Sales have suffered losses 7 months in a row and slumped 2.3% YoY.
Not only is the next rate decision expected to be Hawkish in 14 out of the 20 nations but the pace of monthly Quantitative Easing on a net basis is projected to drop to zero by the end of 2018, from $180 billion at its peak in March of last year. These central banks are being forced into a tightening monetary policy due to rising consumer prices and asset bubbles that have become a major risk to economic stability. Otherwise, these countries risk intractable inflation and a destructive rise in long-term interest rates. Debt levels have seen a significant rise over the past decade. Debt has increased by $70 trillion since 2007, to reach $250 trillion--an increase of over 40%! Not only has the nominal level of debt soared but the leverage ratio is up too.
The world economy suffers a debt to GDP ratio of 320%; it was 270% leading up to the financial crisis. The truth is as long as the bond bubble kept inflating it was able to mask the huge imbalances built up in debt and asset values. But, it no longer will be sustainable given that central banks are now forced to run a tighter monetary policy. The world continues to remain in state of great disequilibrium, both with respect to the global economy and geopolitics as well. Given the macroeconomic picture, gold will be a useful portfolio diversification tool and thereby helping you to reduce overall portfolio risk.
The views expressed here are the personal view of the Fund Manager. The views expressed here do not constitute any guidelines or recommendation on any course of action to be followed by the reader. The views are based on the publicly available information, internally developed data and other sources believed to be reliable. The views are meant for general reading purpose only and are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the readers. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. Recipients of this information should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. None of The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this document.
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