With US inflation figures picking up there has been a lot of debate among investors about why the price has not been responding yet, while if anything we have seen more upside out of silver. We got the opportunity last week to fire off a few questions to fund manager William Cai, a co-founder of US manager Wilshire Phoenix and a former commodities futures strategist with J.P. Morgan in New York.
AT: The gold price does not seem to have fulfilled many traders’ expectations during the pandemic with $2000 still elusive – why is that?
Cai: Be patient. There are several competing drivers (and narratives) affecting gold prices this year. We believe overall support for gold prices remains strong in the intermediate to long term.
AT: Did you see any new dynamics in the gold market during the first 12 months of the pandemic that we did not see previously?
Cai: Gold’s pricing drivers have not changed. What we have not seen previously is the global impact of the pandemic and the massive and coordinated monetary and fiscal response around the world. Gold prices had certainly reacted to those measures. We had predicted that 2021 would be a year of volatility for gold prices as major macro drivers battle for attention. That has certainly been true for 1H 2021 and we believe it will continue for 2H.
AT: Moving to the ongoing concerns over inflation in the US and elsewhere, do you think this will provide more support for gold?
Cai: Yes, inflation expectations are a major driver of gold prices and we believe this will continue to provide support for gold prices in the intermediate to long term. We do, however, expect some knee-jerk reactions and market volatility related to any news of potential tapering of the pandemic monetary measures.
AT: How do you think gold is stacking up against silver at the moment? Is silver more likely to be a winning trade?
Cai: The gold to silver price ratio had experienced some significant volatility in 2020. The ratio has consolidated since Feb of this year and looks to be low from a 5 to 10 year timeframe. But regardless of one’s view of valuation of gold versus silver, gold remains the more reactive metal to changes in fundamentals drivers for both. If the thesis is using gold for its diversifying and hedging benefits for a portfolio, then it would be prudent to stay with gold and not silver.
AT: Can you shed any light on correlations between gold and Treasury yields right now?
Cai: In the long run, real interest rates are negatively correlated to the price of gold. But it is only one of several drivers (e.g. inflation expectation, FX, etc.) that often vie for influence and this has been especially so in 1H 2021. With that said, the recent decline in real yields does offer additional support to gold prices.
AT: We saw a delayed reaction from gold after the Great Financial Crisis in 2008/09 – is there any point comparing that scenario with the current one, or are we in uncharted territory?
Cai: The massive monetary and fiscal response for the pandemic dwarfed what was considered a shockingly large response during the Great Financial Crisis. From that perspective, we are in uncharted territory. But regardless, a bit of patience is needed to see the full effects of those measures to percolate through the economy and trading markets.
AT: Finally, Bitcoin vs Gold – some pundits are calling Bitcoin the new store of value; what’s your take on that?
Cai: Bitcoin has been called digital gold, gold 2.0, the new gold, etc. Simple metaphors can point to Bitcoin’s shared properties with gold, but it’s Bitcoin’s properties as an investment that are important to investors rather than simplified descriptions. We believe instead of focusing on Bitcoin versus gold, explore how Bitcoin, as a new asset, can contribute to one’s portfolio or trading strategy along with gold.
Take away the hype and noise, gold investors should already be familiar with many of Bitcoin’s properties such as low correlation to other assets and potential hedges to inflation as a global asset priced in dollars. However, gold and Bitcoin’s critical differences are worthy of consideration: their low correlation to each other, Bitcoin’s behaviour as a risky asset while gold is a safe haven asset, and Bitcoin’s significant growth potential. Having both assets in a diversified portfolio could help it seek better returns and navigate through different economic and market regimes.