Inflation has gone up. So why isn’t gold trading higher? – I’m looking for Alpha | Omd Cialis

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According to some reports, gold’s performance has been somewhat disappointing this year. The precious metal is traditionally considered a hedge against inflation. Greg Bonnell talks to Daniel Ghali, Senior Commodity Strategist at TD Securities why it didn’t go better.

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Greg Bonnell: Gold has traditionally been considered a hedge against inflation, so why hasn’t it performed better this year? Joining us for more is Daniel Ghali, Senior Commodity Strategist at TD Securities. Daniel, nice to have you here. Let’s start right away. Why didn’t things go better this year?

Daniel Ghali: Well thanks for inviting me Greg. That’s a big question, and the reality is that with the rise of inflation we have also faced the most restrictive central bank regime since the 1980s. And that’s really part of the story of why gold hasn’t done well as an inflation hedge today. And I am expanding on that to say that I really think this is the key question for today’s markets: Do we see a Fed that will cave in while staring at the barrel of a recession, or is it really sticky inflation ? Is the game changing at the helm of the Fed and will they be forced to keep rates high for an extended period of time or continue to raise rates even as we enter recession? The latter scenario, I would say, is probably the apocalyptic scenario for gold.

Greg Bonnell: The Apocalyptic Scenario. You recently had a note saying that gold bugs fall “like dominoes.” take me through it

Daniel Ghali: Yes, absolutely. What we are seeing is a widening exodus of speculative forces in gold. We did, of course, see a rally earlier in the year led by safe-haven inflows into the gold markets. That is resolving now that Ukraine – the war in Ukraine has eroded its importance as an issue for global markets. We’ve also seen money managers as a whole flip their speculative positions short – or net short for the first time since 2019. This is really being led by the trend-following cohort, which is one of the dominant forces – speculative forces in the gold markets, and are of course positioned short as gold trends – have trended down. But I would say that we have yet to see any capitulation by gold speculators.

Greg Bonnell: Wanted to ask you, that’s a word that keeps coming up after the year we’ve had – “surrender”. You actually have a picture for us, maybe, as you say, did we see it or didn’t we see it? Let’s show it to the audience and tell each other what we see here.

Daniel Ghali: Absolutely. I think what we’re looking at here is a chart of AUM for broad commodity funds. If you are familiar with these, these include the shopping cart. And in the past few weeks, we’ve actually witnessed the steepest liquidation event ever when it comes to dollar outflows. This would certainly go along with the theme that there are some signs of gold capitulation, but I would caution against this and say that there is indeed a new gold trading cohort today that has become the dominant speculative force. These are proprietary traders, which are actually firms trading with their own capital, as opposed to money managers who trade on behalf of clients. And proprietary traders have built a massive position in gold. It seems complacent as they have maintained this position for some time even when prices have dropped significantly. And I think that suggests the pain trade is lower.

Greg Bonnell: All right, so there’s a lot going on. There’s a great, certain picture of where we are with gold. Against this background what do we think about the second half of this year until next year or do we just have too many unknowns ahead of us at the moment?

Daniel Ghali: Well, certainly there are a lot of unknowns and going back to – our first point on the central question for global markets today is – are we in front – is Powell more synonymous with an Arthur Burns Fed regime or is he it? closer to a Volcker-era Fed. And we think gold prices are likely to continue selling off, perhaps towards the $1,600 level. But looking medium-term, we believe it will recover as the central bank regime of the past 40 years stands the test of time, and we expect some cutbacks in the second half of next year.

Greg Bonnell: We’ve got about a minute, but you guys – basically we have a long history of gold as a hedge, as a safe haven. Has any of that been eroded lately or do we still hold that position for ourselves as investors?

Daniel Ghali: Well, again, I think it really depends on the regime at the Fed. Gold prices are very close to real interest rates and that’s really one of the main drivers here. So when we talk about gold as an inflation hedge, for example, we’re referring to the idea that if inflation rises and interest rates remain constant, real interest rates will actually fall, which in this case has a positive impact on gold prices. As a safe haven, I’d say that probably won’t last long. So, no, I wouldn’t count on gold as a safe haven.

Greg Bonnell: Fascinating stuff, Daniel. Thank you for joining us.

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