Inflation Has Surged. So, Why Isn't Gold Trading Higher?

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  • Why gold hasn't benefited from higher inflation.
  • How an aggressive Fed helped take the steam out of gold prices.
  • What a recession might mean for gold prices.

Composition with 50 gram gold bar, banknotes and coins

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By some accounts the performance of gold this year has been a bit of a disappointment. The precious metal has traditionally been a hedge against inflation. Greg Bonnell speaks with Daniel Ghali, Senior Commodity Strategist at TD Securities, about why it hasn’t performed better.


Greg Bonnell: Gold is traditionally considered a hedge against inflation, so why hasn't it done better this year? For more, we're joined by Daniel Ghali, senior commodity strategist at TD Securities. Daniel, great to have you here. Let's jump right in. Why hasn't it done better this year?

Daniel Ghali: Well, thanks for having me, Greg. It's a great question and the reality is that as inflation has come up, we've also been faced with the most hawkish central banking regime since the 1980s. And that's really part of the story is why gold hasn't performed well as an inflation hedge today. And I'll expand that to say that I really think that this is the central question for markets today, is are we seeing a Fed that is going to cave as they're staring down the barrel of a recession, or is sticky inflation really going to change the game here at the helm of the Fed, and will they be forced to keep rates elevated for a longer period of time or to continue hiking rates even as we enter into the recession? That latter scenario I'd say is probably the apocalyptic scenario for gold.

Greg Bonnell: The apocalyptic scenario. You recently had a note, where you said gold bugs are falling "like dominoes." Walk me through that.

Daniel Ghali: Yeah, absolutely. What we're seeing is a broadening exodus of the speculative forces in gold. We've seen, of course, earlier in the year a surge led by safe haven inflows into gold markets. That's now been dissipating as the Ukraine -- the war in Ukraine has eroded its relevance as a theme for global markets. We've also seen money managers as a whole turn their speculative position short -- or net short for the first time since 2019. That's really led by the trend following cohort, which is one of the dominant forces -- speculative forces in gold markets, and, of course, are positioned short as gold trends -- has been trending lower. But I would say that we haven't seen capitulation from speculators in gold yet.

Greg Bonnell: Wanted to ask you about that, is a word that keeps coming up over and over after the year we've had -- "capitulation." You actually have a picture for us in terms of, perhaps, as you're saying-- have we seen it or have we not seen this? Let's show it to the audience and tell us what we're looking at here.

Daniel Ghali: Well, absolutely. I think-- what we're looking at here is a chart of the assets under management for broad commodity funds. If you're familiar with these, these hold the basket of commodities. And over the last few weeks, we've actually seen the steepest liquidation event on record when it comes to dollar outflows. So certainly, this would jive with the theme that there is some signs of capitulation in gold, but I would caution that and say that there's actually a new cohort trading gold today, which has become the dominant speculative force. These are proprietary traders, which really are firms that trade their own capital as opposed to money managers, which will trade on behalf of clients. And proprietary traders have built up a massive position in gold. It appears to be complacent as they've held on to that position for some time, even as prices have come down substantially. And I think that points to the pain trade being lower.

Greg Bonnell: All right, so there's a lot going on there. There's a great, sort of, picture of where we're at with gold. With that as our backdrop, what are we thinking about it for the second half of this year into next year or do we just have too many unknowns in front of us right now?

Daniel Ghali: Well, certainly there's a lot of unknowns and goes back to the -- our first point on the central question for global markets today is -- are we facing -- is Powell more synonymous to an Arthur Burns Fed regime or is he closer to a Volcker-era Fed. And what that -- what we think is going to happen is that gold prices are probably going to continue to sell-off, perhaps, towards the $1,600 handle. But as we look forward towards the medium term, we think that it will recover as the central banking regime of the last 40 years is going to stand the test of time and we do expect some cuts in the latter part of next year.

Greg Bonnell: We got about a minute left, but you-- basically we have a long history with gold as using it as a hedge, as a safe haven. Has any of this been eroded lately or we think it still holds that position for us as investors?

Daniel Ghali: Well, again, I think that really depends on the regime at the Fed. Gold prices are very close to real rates and that's really one of the main drivers here. So when we talk about gold as an inflation hedge, for example, that relates to the idea that as inflation rises, if rates stay constant, then real rates are actually declining, in which case that's positive for gold prices. As a safe haven, I'd say that probably doesn't last for a very long period of time. So, no, I wouldn't count on gold as a safe haven.

Greg Bonnell: Fascinating stuff, Daniel. Thanks for joining us.

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