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July 25, 2019Gold Takes Off On U.S. Fed Policy Shift (3:52)
Joe Foster
Joe Foster
Portfolio Manager, Gold Strategy
A shift in U.S. Federal Reserve policy is among the key drivers of gold’s rise into a new, higher trading range and, potentially, the start of a new gold bull market.

Drivers of Gold in 2019

We've seen a significant shift in Fed [U.S. Federal Reserve] policies over the course of 2019. Remember, back in December the Fed was raising rates. This year, they have become more dovish, and at the last FOMC [Federal Open Market Committee] meeting, they indicated that the next move might be a rate cut. With that shift in Fed policy, we've seen interest rates drop significantly. Real rates especially, which are big drivers of gold. Real rates have been falling. Also, the dollar has weakened. In fact, the dollar fell below its trend line recently, and that has also been positive for gold.

Finally, the Fed's cutting rates because they're fearful of the next recession. They see a recession or at least an economic downturn around the corner, and with that comes increased financial risks, so investors are seeking out gold as a safe haven against these risks.

A New Bull Market?

Gold is definitely in a new, higher trading range, and it may have begun a new bull market. If you look at manufacturing around the world, it's been weak. Manufacturing numbers in the U.S. have been deteriorating. I believe we are in a manufacturing recession. If that becomes a broader economic recession, then that brings out risks in the economy that could drive gold much higher.

Key among those risks would be the debt levels. If you look at sovereign debt, first of all, trillion dollar deficits would only go higher in a recession, and at some point, the sovereign debt becomes unsustainable. Corporate debt is now at higher levels than it was in the last cycle in 2007. The quality of corporate debt is much poorer in this cycle, with a large amount of leverage loans, cov-lite loans. Loans of that nature will create a lot of risks in the financial system and maybe even bring another crisis. So, this could be the beginning of a bull market that takes us much higher.

The Impact on Gold Equities

Gold has been range-bound around the $1,200 [per ounce] level for many years now, and these companies are lean and mean. They've got their costs down. They've got their debt levels down. Financially, they're very strong at $1,200 gold. At $1,400 and above, they'd start generating a tremendous amount of cash. They can increase their dividends, increase returns to shareholders.

So the gold companies are very well positioned for higher gold prices. And, also, they're undervalued. A lot of investors have lost interest as gold was range-bound around the $1,200 level, so these stocks are trading at low valuations. So, I think you see a re-rating in these gold stocks in addition to the normal earnings leverage that you see with higher gold prices. And you can see these gold stocks substantially outperform gold in the next bull market.

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