When Can Gold Regain Its Luster?

Patience has been needed as gold struggles this year but outperforming most other asset classes. Gold should regain its luster as a hedge, but what is required?

Two catalysts: (1) Peak in real rates and (2) Peak in the dollar which will likely when the US economy falters with recession likely first half of next year.  Then federal reserve fund rate expectations will peak likely boosting gold. Gold of course pays no carry.

¡  Gold has been impacted by the strong rise in real bond yields (10yr from -1% in March to +1,57% on 29/9) and by the strength of the USD

¡  Gold should regain its luster as a hedge against stagflation risks when the real rates and strong USD headwinds will abate. A declining economic momentum should be accompanied by a weaker dollar and lower long-term bond yields.

¡  EM central banks have reiterated their intention to increase their gold reserves.

¡  The post-COVID recovery of the jewelry sector in China and India should also help.

¡  From a LT perspective, the huge increase in public debt could become unsustainable if long term real rates increase above the real GDP growth rate. If as we expect, economic growth weakens, real long-term rates will have to decline and that is very bullish for gold.

We still advise to keep a longer-term overweight position in gold as it remains our preferred hedge against geopolitical, economic and financial tail risks