INTERVIEW – Gold to rally in H2 when US recovery slows – Lear Capital

Apr 22, 2014 - 4:20 PM GMT
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Orlando, Florida 22/04/2014 – Gold will trade in a narrow range throughout the second quarter of this year but is poised to break higher later in 2014 when cracks start to appear in the US economic recovery, Lear Capital CEO Scott Carter told FastMarkets.

“We’re likely to see better second-quarter US GDP numbers because of pent-up demand from the winter storms. So for the next couple months, I don’t expect gold to move up or down dramatically, unless of course the situation in Ukraine blows up,” Carter said.

“I’m confident that we hit the bottom at $1,180 but, with that said, it will be hard to move out of this $1,280-1,350 area until the second half. However, everything will change when the Fed comes out to slow tapering or sends guidance that economy is weaker than previously thought. That’s when gold will take off,” said Carter, who sees a peak of $1,450 later this year.

The Fed is currently buying agency mortgage-backed securities at a pace of $25 billion per month and longer-term Treasury securities at a pace of $30 billion per month, totalling $55 billion per month. It has cut QE by $10 billion per month at each of the three most recent Federal Open Market Committee meetings.

Monetary easing is seen as inflationary and therefore supportive for gold, which is used as an inflation hedge. The market consensus is that the Fed will wind down QE gradually, exiting the programme completely later this year or early next year.

“It’s interesting that gold has come back to life [in 2014]. This is because expectations were too optimistic for the economy,” Carter said.

Gold futures for June delivery on the Comex division of the New York Mercantile Exchange are now trading at $1,288.00 per ounce, up about seven percent since the start of the year, he noted.

“[Federal Reserve chairwoman Janet] Yellen is a dove – she will turn on a dime if the economy slows or if employment isn’t moving forward fast enough,” Carter said. “She was put on a path by [former Fed chief Ben] Bernanke to get out of the bond buying business but there’s still around $700 billion a year in easing, which is an extraordinary amount of money. To get that down to zero will incredibly difficult.”

“[Yellen] has been more hawkish than I thought she would be over her first four months but her true colours will come out when we see any sort of headwinds in the economy or if the bond vigilantes start to drive yields up,” he added.

GOLD MOVES WEST TO EAST

Gold has undergone a notable migration over the past few years away from Western banks and investors and towards physical buyers in China and India. This trend should continue for the foreseeable future, Carter said.

Chinese gold consumption has quadrupled in the last decade, hitting 1,132 tonnes last year. The country has surpassed India as world’s largest bullion consumer, accounting for 26 percent of global private sector gold demand, a rise from just seven percent in 2003, according to a recent World Gold Council (WGC) report.

In the Chinese private sector, gold is coveted due to a comparative lack of investment options. For many, bullion and jewellery remain the most effective and secure pension fund. And gold’s popularity will only grow as income rises and more citizens move into cities.

Meanwhile, in the governmental sector, the Chinese leadership would like to see the yuan on the world stage as an alternative to the dollar and euro.

“They can’t do that unless there’s some backing with traditional hard assets,” Carter said. “When you look at the US, we have 8,100 tonnes of gold backing the dollar. If you look at Germany, France and Italy they have 9,000 tonnes combined. But China is at just 2,000 tonnes of gold. [China has] a lot of buying to do if they want to get up to par,” Carter said.

ON RUSSIA AND UKRAINE

Developments in Ukraine remain in focus and are likely to affect risk appetite and gold buying. The US State Department this morning warned that new sanction measures could be imposed on Russia in a matter of days.

“If [Russian President Vladimir] Putin’s objective is to take more ground, then gold will go up. Right now, there is a bit of a political standstill but this is a powder-keg. If it were to go off, gold would benefit dramatically,” Carter said.

“And the more sanctions we impose, the more [Russia] will try to impact the bond market,” he added. “Also, those countries that don’t align with the US will try to create their own international transactions. The BRICs will want to trade and barter good with something other than the US dollar.”

Los Angeles-based Lear Capital sells semi-numismatic and premium rare coins. As well as selling precious metals, the company also offers IRA rollover services.

(Editing by Mark Shaw)