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The Risks Ahead for Gold in a High Rate Environment

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The Risks Ahead for Gold

By Ivan Castano for CME Group


  • Despite the growing specter of higher benchmark rates and a strong U.S. economy, gold prices remain high
  • Joseph Stefans, MKS PAMP Group Head of Trading, shares his views on gold in an interview with Jin Hennig, CME Group Managing Director and Global Head of Metals

Gold will continue to show strength in the face of U.S. rate hikes, rising expectations for a soft landing and heightened geopolitical risks, according to Joseph Stefans, Head of Trading at precious metals house MKS PAMP.

While the Federal Reserve’s “higher-for-longer” narrative is depressing prices, the precious metal has remained surprisingly resilient as governments around the world continue to accumulate it amid growing economic and political risks.

“Most assets are impacted by the Fed and its path in terms of whether it is looking to hike or aggressively hike in the foreseeable future and gold is no exception,” said Stefans, responding to a question from Jin Hennig, CME Group Global Head of Metals, about how U.S. monetary policy will impact bullion.

His remarks came as part of an OpenMarkets Exchange of Ideas panel. The interview took place following CME Group’s annual precious metals dinner in New York in September.

Despite the growing specter of higher benchmark rates and a strong U.S. economy, gold prices (hovering above $1,800 an ounce in early October) haven’t fallen as far as some might have expected, and could be buoyed by nations’ desires to hoard it based on their economic situation. It may be benefiting from concerns around lingering recessionary and geopolitical risks such as the Russia-Ukraine war and fragile U.S.-China relations.

“Gold is a global investment asset. There are very different economic scenarios across countries around the world,” said Stefans. “So while it makes sense to cut allocations in the U.S. and North America, the opposite is true in a lot of other countries where it makes sense to add gold to portfolios.”

Asked what a U.S. soft landing or recession will mean for gold, Stefans stressed strong demand could continue to lift prices.

“Six months ago, we were in a very dark period in terms of where we thought the U.S. and other countries were heading. Now we are predicting a much softer landing which takes away some of gold’s safe haven status,” Stefans remarked.

“But gold has become much more than a safe haven. People are buying it for other reasons, such as to diversify away from local currencies or offset economic uncertainties in their countries or regions. So while a soft landing scenario is not necessarily a bullish catalyst for gold, I don’t think it’s as bearish as most of the market would lead you to believe.”

U.S. Strength

Hennig highlighted the United States’ stronger-than-expected economic performance and how that has boosted the dollar while treasury yields remain high – a heady cocktail that could affect gold and other precious metal prices in the long term.

While agreeing the dollar should remain high amid that backdrop, Stefans noted that Washington’s rising financing costs threaten to undermine its debt profile and that’s prompting some governments to accumulate gold in lieu of treasuries.

“Some countries who are traditional buyers of U.S. debt are now diversifying into other things like gold,” Stefans noted, adding that this trend could provide a long-term headwind against the greenback and support gold. “When I look at the next three, to five to seven and 10 years, this is something that could play out in gold’s favor.”

Biggest Risk for Gold?

With an eye to 2024, Hennig asked about the biggest risks for precious metals investors to watch.

Stefans answered the near-term outlook remains “tough, not only for gold but commodities in general as they are zero-yielding assets” viewed against high treasury yields, so they should be focusing on long-term opportunities.

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

“We are seeing that with the two and 10-year yield inversion, which is starting to flatten out but remains inverted. This shows investors are still concerned about what the future will look like, not only for the U.S. but also on a macro global level, and that uncertainty continues to bring people into gold.”

Risk Management “Extremely Important”

Amid such challenges, Stefans said proper risk management has become pivotal at MKS PAMP.

“It’s extremely important… We are in a binary space, especially if you are talking about short-term risk management. Any headline can drive markets 1% to 4% higher or lower on a given day and that makes it very, very tricky to be in our seats and for others within our industry to manage the market.”

Heightened volatility has fueled record demand for CME Group’s Short-Dated Gold options contracts, including those covering Monday, Wednesday and Friday expiries, according to Hennig. Interest in Micro Gold contracts has also grown “tremendously” in the past five years, she added.

The bulk of this growth has come from retail investors looking at safe havens such as gold to diversify their holdings amid looming risks. When asked how this has impacted the overall market, Stefans noted the phenomenon has been widely felt, sending premiums for small gold bars and coins into record territory.

“Investors continue to want their money allocated in a safe type of haven such as gold because of future uncertainty and/or currency volatility, not only with the dollar but also with the Turkish lira or Chinese renminbi,” Stefans said. “Across the world, the uncertainty of what is happening, including in their own countries, is driving retail investors into precious metals products.”

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