Gold price and stocks both have upside; the biggest risks and opportunities to watch

by birtanpublished on August 23, 2020

Gold is seeing a lot more volatility this week as bond yields have finally started to rise joining me today to talk about his macro views and what to look out for is rob hayworth senior investment strategist at u.s bank wealth management

Bob it's uh it's your first time on kitco welcome to the show glad to be here david thank you so rob we are seeing a lot more volatility in gold this week what

Do you make of this price drop that we've seen well a couple of things one we've been pretty overbought for a couple of days now so i think it's it's been time for uh investors to take some profits

When they can uh and two uh what we're seeing in recent times is real yields are finally starting to rise so that's a bond yields less inflation expectations are starting to rise which

Is pressuring uh gold as well so i you know i think it's it's been time for a bit of a correction and we're getting that now so this is a healthy move is what you're saying

Yeah we think it's constructive i mean the the you know the price of gold has been stretched from our expectations relative to to those real yields relative to inflation expectations relative to the fed

Position uh and even relative to the u.s dollar and so we're getting it more back in line with what we'd see as a a good fundamental price and what's the story behind the

Uh behind the u.s dollar and uh bond yields this week what's the counterbalance to gold well on on the bond yield side i think it's uh the hopes that you're going to get

Better real growth in this economy and and you had news uh certainly this morning uh of hopes for for more tax cuts for more fiscal stimulus coming out of the government

And that's boosting some hope for for uh for real growth uh yeah a few months ago the stock markets were pricing in um fed stimulus which is why we saw

A massive uh rally in pretty much all the indices but uh are you are would you say that much of the stimulus aspect of growth has already been priced in and now the the markets are looking for new reasons

To uh continue along uh continue maintaining the long positions uh yeah yeah i think um probably the best way for us to state it is uh the market is is really

Priced in what the fed is currently done i think the fed could be tested more and uh the onus is probably right now more on uh the government uh for fiscal stimulus

Um we have the sun setting of uh the six hundred dollar uh bonus and unemployment claims um that that sun cited here at the end of july and that's going to mean incomes are

Going to drop off off the cliff uh a bit for a lot of people so so getting more fiscal stimulus would be helpful i do think though that the gold prices

In particular but even the market in particular would be further supported by the continued growth in the fed balance sheet we've priced in quite a bit of fed balance sheet expansion and asset purchases today

As those continue that probably continues to give the market some room to climb uh in in response to to the continued growth in the fed balance sheet rob uh just on the economy i've heard

Two extremes on the argument of economic recovery one which is that the data um has proven that we are still in a rut and we will continue to suffer for months

Possibly even years on end and the other extreme is that we are already seeing near uh a perfect recovery back to pre-covet levels everyone is already out uh spending on a consumer level has

Resumed shopping is resuming people are resuming their normal daily lives is basically what what i've been told from this side of the story where do you stand

Uh we're probably in the middle we still see the glasses half full uh yes we've gotten a good recovery off the bottom right the economy has reopened in some sense and we think we're in the midst of recovery

The challenge for us is the high frequency data has flattened out a bit so if we look at traveling whether it's the tsa data we look at open table who's who's dining in restaurants the

Improvements are starting to flatten out and so we're not in our opinion yet back to pre-covered levels of activity overall nor are we back to pre-covered levels and employment so there's

There's more room for improvement and recovery in the in the days ahead um but we're off the worst levels and i i think that's where the market is looking for that stimulus to help us get

Back to fully normal which but again which probably uh is waiting for a little more for a vaccine or some other medical breakthrough

To uh to allow us to fully and safely reopen the full economy and get everyone back to work when you when you look at it bob we're right now in august it's been less than two quarters

Uh since we've had uh the worst of the coronavirus breakout is it possible that we have not yet seen the worst of um economic fallout and can we possibly see down the line the real repercussions hit

The economy uh well in in terms of the covet shutdown i think we have seen the worst probably in the second quarter data i mean the the second report of gdp could maybe

Be worse right there's there's a lot to come through there um that doesn't mean we're out of the woods yet uh and and so for us the things we're watching and worrying about are

You know what are the debt what are the ramifications uh on borrowers as we move forward if we don't get economic activity uh back far enough um do the debt markets start to shut down again or

Perhaps companies move into solvency problems and we have more of a normal recession that we could enter as we move forward we're still fairly constructive right we still

Think there's enough room with federal reserve stimulus with further government support for the economy to continue to slowly grind higher in this recovery

But there are downside risks and there are it's me a meaningful number of downside risks when we're talking about 10.2 unemployment in the month of july what are the um

Consequences if any of rapid expansions in the fed balance sheet on economic growth well in the in the near term it's constructive it's getting inflation up a little

Higher it's providing support to the financial system it's providing confidence in the financial system and the financial asset prices when we get back to a more normal growth

In inflation environment and that really means more people back to work there is risk of inflation in that scenario we think the fed should be taken seriously that they're going to reach their inflation target

And so inflation should come back into that two percent range as measured by consumer price inflation or perhaps personal consumption expenditures but we don't think that there's an

Inflationary problem down the road if the fed stays too long past kind of this more normal growth environment we may start talking uh in time about risks of inflation in the system so we're going to see inflation first

Before possible deflation is that what you're saying uh we could see we're i think we're going to see a normal reflationary scenario moving from very low inflation to normal

Inflation and there's risks of inflation accelerating should the fed continue to expand its balance sheet in a normal uh growth environment but that's some time away

And there are risks of deflation on the other side of this the challenge we have right now is we have access supply in a large number of goods and services labor

Is one uh but oil would certainly be be a second a close second and so there are some i'll hedge this back also there are some deflationary risks in the near term we think we're on the

Side of kind of inflation normalizing back towards the two percent federal reserve target and then there are two sided risks ahead depending upon what happens with growth

Overall rob do you think that aggregate demand could have recovered even if the federal reserve had not expanded his balance sheet this year i i think the challenge is is how we

Have to combat the coronavirus which has meant meaningful shutdowns and and so the fed has been extremely helpful in maintaining the operations of the financial system um

But probably hasn't had a huge impact on in the end on aggregate demand which is is all about uh are we able to reopen the economy fully or not so what really was the role of quantitative easing on a level that

We've never really seen before financial market confidence okay one we've held rates low so borrowing costs are low two we've made it easier for companies to borrow

There was an example across the tape this morning you had one of the lowest ever high-yield bond issues uh sorry lowest yield ever on a high-yield bond issue this morning from ball

Corporation uh a piece of tenure paper at less than three percent for a for a below investment grade issue which is extremely low so the so the federal reserve action has

Really made it so that many companies can get financing at cheap rates uh which is helping them stay in business um which is is a meaningful support in this economy

Which is driven by credit could capital markets see a liquidity trap as we saw post 20 uh 2008 when there was a lot of liquidity in the system but nobody was lending or borrowing

Immediately we've already gotten past that uh that really was happening in march we think we've moved past that for now with with the fed providing uh ample uh ample stimulus in the system and

Ample liquidity to the system and we've even seen uh uh some of those short-term measures uh move out of their balance sheet so a couple weeks ago we were seeing a dip in the federal reserve balance sheet

Uh which was the runoff in the repos they'd accumulated and now the balance sheet is growing again as they continue to buy mortgage-backed securities and treasury bonds what's your sentiment on current u.s

Equities valuations right now they're on the full side but uh but with with where the fed is uh we we think there's there's room for them to run um we're we're comfortable that that

With you know we're still in a low inflation environment even if the fed gets back to more normal inflation's rate rates we're still in a low inflation environment there's room for earnings to recover and

Grow and we're seeing earnings expectations start to climb for third and fourth quarter earnings um and and the fundamental picture the technical picture looks pretty good so we think there's still

Room for stocks to perform even with valuations at fairly fully valued levels okay so you're constructive on the equities for now we are so uh rob why is it necessary for

The fed to maintain their stimulus measures even if like you mentioned before the economy is on the right track to recovery albeit rather slowly uh because it'll take time we're not yet

Out of the woods and so the federal reserve needs to continue to provide that backstop uh with it as they even think about their dual mandate right one of the one of the elements in their mandate is

A uh a level of full employment and we're not yet at their inflation target and we're we're kind of well above normal rates of of unemployment so i i think they

They've got more work to do how would you personally uh allocate your assets right now in your portfolio where are you underweight where are you overweight yeah it is a challenging time for

Investors as as we look at the performance in the stock market that said uh uh we'd say you you today should be fairly normally allocated between stocks and bonds

So whatever your long-term target is you should probably stick to that long-term target for now until we get through this recovery scenario and probably into a more growth oriented scenario

On the fixed income side it's worth taking some uh taking some risk in credit uh as was as the federal reserve has provided the backstop to bonds that's we've seen credit spreads

Meaning the the yield on lower quality investments is compressed somewhat relative to higher quality investments relative to us treasuries we think that continues so that's a place to take some

Additional risk and portfolios relative to your fixed income portfolio on the equity side we tilt towards growth-oriented companies secular growth is still in short supply in this economy and so those stories uh

Will probably continue to do well as we move forward and the place we're probably least enamored of right now is uh is developed international so europe and japan we'd underweight

Uh those those economies in order to fund that overweight secular growth just on the credit side of your story are you at all concerned about the potential for more bankruptcies across corporate

America that could push credit ratings down uh yes absolutely um as we there are certainly companies that are that are under stress or under distress um and this is where

Active managers are probably really important to help you steer clear of some of those pitfalls and problems um and so that's what what we use within our portfolios is active managers

That said we still think the overall trend right kind of across the entire market is going to be for those spreads to remain relatively tight and a lot of that has to do with fed support the federal reserve out there buying

Uh corporate bonds directly is going to continue to provide support to that market especially for those that by and large won't have distress or default problems just going back to the equity study

Portfolio you mentioned earlier that you're still constructive on on stocks uh if that were the case would you not urge the sigh of being or other side of being more aggressive than

An equal allocation of bonds and equities yeah no that's a that's a great question it's something we continue to think about i think the challenge for us is it's really still a two-sided uh

There's there's a two-sided scenario as we look forward and there's an awful lot of risks to get through in the meantime one we don't yet have fiscal stimulus uh decided upon and

Congress and the white house continue to be at someone at odds uh two we need to get through the back to school uh uh season um and that's a large question for many families and will have an

Impact on employment and whether people come back into the labor force as we get back to school if we get back to school i know for for me here in seattle for example the kids are going to

Virtual learning which is going to create a challenge and we need to make those decisions across the economy and then the third uh two-sided uh risk for us is actually the election um right now we have uh vice president

Biden in the lead in certain polls that's we need to probably get more clarity uh before the market really starts to face the uncertainty of this next presidential election

And so there are in our minds still two-sided risks uh in this environment as we move forward uh both largely to the upside and the downside so we've erred on the side of a little

Bit of more more balanced risk in our portfolios rather than getting more aggressive on one side of the other in your view is there a political outcome that would be

More negative for equities prices we don't really see that yet we need to see a lot more on policies some of the indications we've seen there were early expectations that if there was a democratic wave it would

Be very challenging for the market some of the initial policies we've seen have been much more moderate than i think the the street had originally expected so we need to we need to see a little more to really have a good handle on

On what the market may do how does gold fit into your thesis for uh portfolio allocation yeah gold's getting attractive for us at this point especially with this decline and the the primary purpose of it would

Be to provide some downside protection relative to our equity position the challenge for most investors right now is you're getting paid very little to own 10-year us treasuries today at 0.64

Percent um you're get you're just not getting paid much to own those so that makes gold somewhat more attractive as a defensive asset in portfolios and that's how we're thinking about it

So rob has gold always been an asset that's been on your radar or was it something that you've paid attention to only in recent months as prices rallied yeah we haven't always had an allocation in our portfolios but it's something

That we put we do analyze on a daily weekly basis because of that characteristic i think that the challenge for investors in gold is there's no cash flow to compensate you for holding

It over time so you very much need prices to continue to go higher to be compensated for holding that asset so we've used it more as a tactical asset than a strategic permanently held asset

And and in this environment it's becoming more attractive to us uh rob i want to thank you for your time today and um and uh for sharing your thoughts appreciate it thank you very much david

It's good to be here i'm dave linda kiko news thanks for watching we'll have more for you so stay tuned you

Related Videos

Yamana gold has recently launched a new standard in tailings management and here to talk to us about this initiative is senior vice president of health safety a...
He's peter hogg director of precious metals here at kikko peter welcome back it's good to be here michael uh everybody was predicting this uh precious m...
Gold traders took profits this week as the bullion saw the largest single day drop in years on tuesday but how are hedge funds an institutional investor's p...
Gold prices have taken a hit tuesday but can this downward trajectory continue uh here to talk about this correction and his long-term forecast for gold is joe ...
He's will ryan ceo of granite chairs will welcome to kitko thank you michael good to be back let's talk precious metals versus treasuries in a note toda...
Gold took its largest single day drop in years on tuesday what happened here to talk about this and answer this question is gary wagner editor of the goldforeca...
Gold is seeing a lot more volatility this week as bond yields have finally started to rise joining me today to talk about his macro views and what to look out f...
Welcome to kitco news i'm niels christensen the gold market continues to see surging momentum but can this momentum last in an environment where we're s...
Okay let's shift gears now to the base metals uh elon musk in his second quarter earnings call uh has made this statement i'm just going to read it tesl...
As gold hit the much anticipated two thousand dollars announced this week our next guest warns that more volatility is coming up joining me today is george giro...
Our next guest is frank holmes a guest everyone's familiar with on our show he's been calling for gold prices to hit all-time highs for basically ever a...
All right we have a few minutes left so i have one last question for the both of you what are the major risks that you're looking out for today we're al...
gold futures hit new record highs speeding 2011 year highs of 1920. anna's remained very bullish on gold stating that the two thousand dollar price tag is ...
On the same day police have made - at first unrelated of arrest they arrests a gentleman named Al and they caught him red-handed selling drugs so it's an op...
What I want to do in this video is get a better understanding of oligopolies and we'll be talking about it I'll they got pulleys we'll be talking ab...
What I want to do in this video is think about why it's so hard for a monopolistic monopolistic competitor to make money in the long run and just as a remin...
We've spoken a lot about monopolies monopolies monopolies and we've spoken a lot about perfect competition perfect competition and we kind of view them ...
What I want to do in this video is review the revenue and cost graphs for a monopoly for a monopoly so let's up here let's draw the demand curve for the...
For those of you who are curious and have a little bit of a background in calculus I thought I would do a very optional and when I say it's optional you don...
Based on what we've done in the last two videos we've been able to figure out what the marginal revenue curve looks like for the monopolist here for the...