There’s a New Bullish Case to Go Long Gold – Longview Economics
The comments below are an edited and abridged synopsis of an article by Ernest Hoffman
The current run of record central bank purchases has helped support the gold price, but there’s a new reason why investors should be long gold, according to Chris Watling, Chief Market Strategist at Longview Economics.
“[A]s we outlined in our recent analysis of central bank/official buying of gold, there’s no clear correlation between the level/growth of their purchases and the direction of the gold price,” Watling said. “Indeed, apart from the past 18 months since the war, the gold price has been highly correlated with our 3-factor macro-driven gold model,” that focuses on TIPS, interest rate expectations, and the performance of the US dollar.
Watling said the key question is why this relationship has broken down over the last year and a half.
Up for discussion: Central bank buying; the TIPS yield; selling of US Treasuries by China; gold’s attractive long outlook; deflation posing a growing risk; and the outlook for the US dollar.
Watling cautioned that there are still risks to his bullish gold scenario, including a 2008-style credit crunch driven by the Fed’s dramatic tightening, but pointed to the March banking crisis as proof that the central bank was ready and willing to flood the system with liquidity to prevent this. “Hence it’s a low-risk event (for long gold positions),” he said. “Other risks include dollar strength—although it’s noteworthy that gold rallied in 2001 (during that recession) despite bouts of dollar strength.”
Spot gold continues to hold recent gains, currently trading at $1,939.00 (as of August 29).