What Is the Outlook of Gold?

Where are we in the gold price cycle, and what is the future path of gold? Below is our conversation with Bruce Liegel for his analysis on what lies ahead for gold. 

Hedder: What’s the main driver for gold ?

Bruce: Gold has been in a bull market since 2000. What really drives gold is what we call real interest rates.

Real interest rates are the difference between the nominal rates and inflation. So if the nominal rate of interest is 10% and inflation is 5%, the real rate is 5%.

What has happened over the last 20 years is that interest rates were close to zero, and even though inflation was non-existent, it was still running around 2%. So you had a negative real rate. 

A negative real rate is something that gold loves. We've had negative real rates for a long time in the US, and that has caused the surge in gold prices. It's kind of like a store of wealth of value that you buy gold when you have negative rates, and that has driven gold a lot higher because of these negative real rates.

Now though, real rates are starting to turn positive. Depending on what metric you use, some of them are still a little bit negative, some of them are positive. Right now, the 10 year is around 5% and inflation is running around 3.5-5% depending on what you want to use as your measure. So real rates are not negative anymore. They're close to zero or possibly positive. That is negative for gold.

How do you see gold prices trending in the three to five years?

Bruce: Once central banks stop tightening and start easing rates, which could be next year, gold will probably go higher. If we have a global recession – and depending if it's a soft landing or it's a hard landing – that will impact the amount of easing that the central banks will carry out. The more easing, the higher gold can go later next year and into 2025.

The future path of gold is probably higher. It's going to be determined by the degree of the landing. If it’s a hard landing, it'll go up a lot more because it means the central banks will ease more and they have to print again. A soft landing means that maybe they don't have to ease quite as much. But as I said earlier, if we do have a hard landing, it sets the case for even a stronger inflationary interest rate environment later on because it puts more fuel onto the fire down the road again. 

My bigger concern is that if the central banks do go into a huge easing mode, it sets up the next phase of higher rates and higher inflation.

You recently spoke about the “institutionalization” of gold. Can you elaborate on that?

Bruce: Gold has really been institutionalized over the last 10 years. It used to be that as an investor, you could buy gold stocks; you could buy names of gold companies; you could maybe go down the street and you could buy some gold from a gold dealer. But gold has now been institutionalized so you can actually buy ETFs like GLD, which basically follows the path of gold. They also have some gold ETFs like GDX or GDXJ. GDX is kind of like the gold miners for major miners. GDXJ is the junior miners.

The problem with buying those gold miners is they have underperformed. GDX has underperformed gold by about 40% over the last 10 years. And GDXJ, the junior miners, has underperformed gold by over 70%. And what's going on in gold is that a lot of the institutional money now can just go buy GLD. Before, they had to go buy the individual stocks, but now they want the direct correlation to gold. So they just buy GLD or another type of gold ETF that tracks the price of gold. That's probably the easiest investment. The same thing could be said about silver. You're just seeing a lot more money flow into gold than you are silver.

I think gold has over $200 billion in their ETFs for gold tracking; not gold companies, but just ETFs attract gold. Silver is a lot smaller, like maybe a third of that. So you're seeing a lot more institutional money flow into GLD type instruments.

Why is there more money being poured into gold over silver?

Bruce: The institutionalization of gold has been the big driver. It used to be where you had to go buy a bar of gold or gold coins; it's pretty expensive. But by buying one share of GLD, it's very affordable for even a small investor. So I think that has been part of the driver. Silver is really unperformed gold over the last 10 to 15 years. If you really like silver, it's because it's going to be used for some type of industrial use; maybe in EVs or some other use. Silver is much more industrialized metal than gold is. Gold is more of a protector of wealth or maybe some jewelry demand in India and the far east.

For the most part, gold is really an investment and usually for safe haven keeping, versus silver has historically been the cheap way to play it. But now you don't have to do that because you can just buy GLD or another ETF, and it doesn't require a large sum of investment to get involved. So I think that change occurred over the last 10 years, and that's what has really driven gold versus silver and also gold versus the gold miners.

What role does gold play when it comes to central bank holdings?

Bruce: Central banks have also been large purchasers of gold over the last five to 10 years; primarily Russia, China, and India. Saudi Arabia has also been in there buying a lot of gold. So as central banks buy gold, it also pushes up the price. Earlier, 15 years ago or so, some of the central banks in Western Europe are large sellers of gold and they have not purchased those back. Those sales do not look too good now that gold has gone from $600 an ounce close to its 2000 or so today. But net, net, we've seen large central bank buying of gold as I mentioned earlier, and that has also supported prices.

Can you expand on the idea of gold being a safe haven asset?

Bruce: Gold is a safe haven in regards to fiat or central bank printing. I didn't touch on this earlier, but another driver of gold has been the large amount of money that central banks globally have printed over the last 20 years. It's in the trillions. So gold was a safe haven to maintain your purchasing power. As central banks have pushed liquidity into the system, people get worried about the devaluation of their currency. So far, the dollar has been in a bull market since 2008; it has gone up dramatically and net, net, the dollar continues to be the safe haven. But people are concerned that with all the debt in the US and all the money printing that eventually the dollar's going to get devalued, and then gold will soar to some five, $6,000. I'm not in that camp.

But the dollar is in a bull market right now. I think we're nearing the end of it and that'll probably occur next year. When the dollar tops out, that will help start the next commodity bull market and that will also drive the price of gold as a dollar weakens. So that's your safe haven play there. It's more of a concern about money printing, and central banks losing control of the money supply, which we've seen over the last couple years. 

Related Readings:

The Carry in the Conundrum

The Institutionalization of Gold