Schroders comments on the current state of the gold market

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(Kitco News) – Fund manager James Luke of Schroders specializes in gold and merchandise. He was recently interviewed (City AM) about his thoughts on the gold market and whether it could continue to rise.

Speaking about market fundamentals and what central banks hold, he said: “Generally speaking, many emerging market central banks hold less than 5% of their total foreign currency reserves in gold – mostly hold US dollars and other major currencies. The big question is whether some of those reserves could find their way into the gold market as central banks seek to diversify. If countries like China, Saudi Arabia, the United Arab Emirates, Brazil and others began to move their market allocation towards the 20% already held by large holders like Russia, the impact on the gold market would be very significant. Gold is a small market at current prices.

Looking at the most recent price increase, Luke noted: “Overall, though, the real story for gold has been that we were already seeing a significant shift in private investment demand for gold, particularly from North America and Europe, before the invasion. We expect that to continue. So now we have a much higher probability of a scenario where you have strong private and public (central bank) demand for gold.”

He added: “So it’s fair to say that the invasion itself probably triggered some of those flows, but I think it’s also fair to say that a lot of those flows were already in progress. In general, when you have these kinds of geopolitical impacts, gold prices tend to “explode”, but this is usually not sustained.

Speaking about the US Federal Reserve, James Luke said: “I think it’s more likely that the biggest changes in the private sector gold market are almost all related to large uncertainties around the rate hike cycle. Federal Reserve, given the risks of unintended consequences for the economy.” growth or financial markets. In response to the Covid pandemic, the authorities undertook an unprecedented monetary and fiscal stimulus. But let’s remember that since 2008, every time the Fed has tried to remove monetary stimulus, the market has forced it to change course. We doubt that is the case. different this time. It’s a crude analogy, but the economy is like a patient who has been given huge amounts of medicine to get through a period of crisis. If you suddenly remove those medications, you can expect withdrawal symptoms to be quite severe.”

Inflation has been a hot topic with the Schroders fund manager adding: “If inflation stays strong, which it should be, and employment is still strong in the US coming up in the short term, which is what the market it’s already pricing in, as you say where we’re skeptical is that the Fed can do this without creating significant negative feedback loops in parts of the economy that are sensitive to interest rates, like the housing market.

He added: “We are also concerned about reports of poor liquidity conditions in Treasury markets emerging before the Fed has started selling its own Treasury holdings (which were built up through quantitative easing programs). that these are the deepest and most liquid markets in the world.

Lastly, on the Fed, he said: “The question is whether the Fed can move away from Treasuries without triggering disorderly market conditions. We think the likelihood of this happening is much higher than the market believes. This is a very contrary consensus and outdated view”.

When asked, do central banks still have the right tools to fight inflation? He said: “They don’t have the tools to control a commodity supply shock or to control the unblocking of global supply chains, that’s for sure. So ‘stagflationary’ forces are clearly difficult to manage. Stagflation is an economic condition in which growth is low while inflation is high.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has gone to great lengths to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage arising from the use of this publication.

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