Murenbeeld of Dundee talks gold market

VANCOUVER — During a spirited macroeconomic session at the annual Mineral Exploration Roundup conference — hosted by the Association for Mineral Exploration British Columbia — Dundee Economics chief economist Martin Murenbeeld opined on the gold market’s near-term future, saying that while the world economy faces headwinds, conditions are ripe for a sustainable rally in precious metal prices.

The U.S. dollar

Murenbeeld noted that gold “does not typically rise” in U.S. dollar terms if the “dollar itself is rising against other currencies.” The U.S. dollar has been on a two-year bull run driven by a perceived economic recovery and a need for safe-haven investments, due to structural problems among other major global economies in Europe and Asia.

In December the U.S. Federal Reserve raised its key interest rate from 0.00–0.25% to 0.25–0.5%. Rate increases are a way of saying that the economy is gaining strength. Another hike could be in store before April, which doesn’t always mean an upcoming fall for the U.S. dollar.

“The dollar is fundamentally overvalued … at some point it has to come down. That’s what I’m waiting for, and hopefully it will be this year, because that would be positive for commodity prices,” Murenbeeld said.

“There are problems with a dollar that is overvalued, and that’s why we’re pretty pessimistic on U.S. gross domestic product (GDP). The dollar is a heavy hand in growth. It effects investment, exports and vexes the Federal Reserve, because it is trying to promote inflation. So the high dollar will be the number-one reason why the economy will likely ‘underperform’ policy expectations, and interest rates won’t be raised nearly the amount everyone expects,” he added.

The market might structurally decrease the value of the dollar, but there are other things that could end the rally. Republican candidates in the U.S. election have discussed a tariff on imports in excess of 40%. Murenbeeld noted that according to his models, this is around how “overvalued” the U.S. dollar is at the moment.

Equity markets

Broader equity performance could be another influence on gold markets, Murenbeeld said. Between late 2011 and July 2015, Standard & Poor’s 500 Index gained 80%, or 931.83 points, as the U.S. recovered from its Great Recession. During the same four-year period, gold bullion futures contracts dropped nearly US$800 per oz.

Gold prices have rallied to start 2016, even as equities struggle. The S&P 500 is down nearly 10% to start the year, while February contracts for bullion have gained nearly 6%, or US$59.60 per oz.

“The correlation between gold and the S&P 500 has been profoundly negative over the past four years — more so than it has been over the long-term — and that’s why gold is such a great portfolio diversifier,” Murenbeeld explained.

“What we saw around five months ago was that equity markets hit a major bump in the road, which obviously leads to higher demand for diversification. I’m of the opinion that we are in for a volatile year in the equity markets,” he added.

What’s in store

Other factors could help boost the gold price. Rising debt-to-GDP levels, stalled inflation rates and a lack of liquidity could mean more global market shocks in the form of bankruptcies and defaults. Murenbeeld said that during a recent trip to Shanghai, he was told the Chinese government looked to raise its gold reserves from 1,700 tonnes to close to 5,000 tonnes.

According to Dundee’s probability numbers, gold could break out of its downward trend and stay above US$1,200 per oz. as soon as this year.

“There are two things I believe will happen this year,” Murenbeeld said. “First, the Federal Reserve is not going to raise interest rates as much as the market expects. Second, you will see more protectionism out of the U.S., because the economy is going to disappoint policy-makers, which will increase the pressure to act.”