Investors Need Gold in Their Portfolios for This Reason

At this year’s Mines and Money Americas conference in Toronto, the Investing News Network spoke with Ani Markova, vice president and portfolio manager at AGF Investments (TSX:AGF.B).

She discussed what happened to gold in Q3 and why, what to expect from the gold price in 2019 and how the US dollar/gold relationship will play out next year and beyond.

Markova noted that despite the issues that kept gold down in the last two quarters, she is feeling optimistic about the precious metal moving forward.

“I’m getting encouraged because gold is doing what gold is supposed to do, which is being the portfolio diversifier. We’re seeing what happens when we have an equity market correction and gold starts to rally in the back of it,” she said.

“As I have been advising our investors, ‘you need to own some gold in your portfolio,’ because it has a negative correlation to equity markets and it is a true diversifier within the portfolio,” Markova explained.

In terms of how gold will perform in 2019, Markova put a lot of weight on midterm election results.

“We’re heading into midterm elections, and it’s really important. It’s really important because the fiscal policy will be determined by this outcome, by this election and how much more spending we’ll see from the US government over the next two to three years,” she noted.

She added, “we’re in an environment where the Fed or essential banks are starting to — going to be a bit tightening, they’re taking equity up, they’re raising interest rates at a time when the US government wants to push more stimulus. And we see massive stimulus, but it will lead to big deficits.”

And what will the big deficits bring? Markova believes they will lead to a stronger gold price.

She stated, “those deficits really spell out mid- to long-term weakness of the US dollar. So I think gold will have its moment in time, maybe not in the fourth quarter per se, because after the US elections the equity markets tend to rally back up, but I think in the mid to long term, we’re in an environment where I could see some of those catalysts playing well with the gold trade.”

Read the full transcript below for more insight from Markova. You can also click here to view our full Mines and Money Americas interview playlist on YouTube.

INN: How has the conference been so far?

AM: It’s very interesting. There’s a lot of new technology companies presenting, so I’m very excited to see that.

INN: Now, gold and silver just came off another particularly rough quarter. Can you tell me a little bit about what happened in Q3 in terms of prices and what affected those prices? 

AM: It’s been a very rollercoaster ride for gold this year as well. And certainly since April the US dollar has rallied very strongly and put a bit of a damper on the gold price. Then certainly the net short positions climbed, putting a lot more pressure on the downside of gold. So we’re in that environment where we have a lot of headwinds.

Recently, however, I’m getting encouraged because gold is doing what gold is supposed to do, which is being the portfolio diversifier. We’re seeing what happens when we have an equity market correction and gold starts to rally in the back of it. As I have been advising our investors, “you need to own some gold in your portfolio,” because it has a negative correlation to equity markets and it is a true diversifier within the portfolio.

INN:  We are in the fourth quarter now, so I was wondering what you think is going to happen with gold and silver in terms of prices and supply and demand during this quarter? 

AM: I mean, I look at the gold trade. We’re heading into midterm elections, and it’s really important. It’s really important because the fiscal policy will be determined by this outcome, by this election and how much more spending we’ll see from the US government over the next two to three years. It is important because we’re in an environment where the Fed or essential banks are starting to — going to be a bit tightening, they’re taking equity up, they’re raising interest rates at a time when the US government wants to push more stimulus. And we see massive stimulus, but it will lead to big deficits. And those deficits really spell out mid- to long-term weakness of the US dollar.

So I think gold will have its moment in time, maybe not in the fourth quarter per se, because after the US elections the equity markets tend to rally back up, but I think in the mid to long term, we’re in an environment where I could see some of those catalysts playing well with the gold trade.

INN: In terms of the US dollar in particular, do you see that probably shifting down in 2019?

AM: The dollar now is kind of moderated — it’s going sideways. To me, the dollar has been very politicized because now there’s all these trade agreements that are in negotiation. The biggest one coming up is China, and what happens with the Chinese renminbi in that equation? To me it’s really a look at who is doing best economically. Is the rest of the world going to do better than the US dollar? That would put down the price of the US dollar; however, the PMIs are rolling over, so [there is] a bit of an uncertainty here.

And it could really mean we have to rush in. I think the dollar weakness will be engineered. Trump has said we want a weaker dollar because that solved a lot of our trade issues. And on the flip side, we have a tightening of the Fed, which by itself takes US dollars out of the system and brings in the need and the demand for US dollars and paying all these debts. So it’s a very fine balance. I think net-net in 2019 we have to look at what the economy is doing, and is there going to be a fiscal clip in 2020. And what would the Fed do if there are signals of recessions? So we’re all ears and it is all data dependent.

INN: You mentioned China and you also mentioned the Fed, so I have a two-part question for you. Again, this is looking ahead toward 2019 and even further on. Do you think that the same political concerns that we experienced this year will continue on next year in terms of the trading concerns with China? And in September it was said that there might be two hikes in 2019 — do you think that that is likely and what does that mean for gold?

AM: I need to separate the economic activities vs. the geopolitics. I mean, economic activities I still believe we can see probably a stronger US economy because there’s been a massive infusion of fiscal stimulus in our system between the tax cuts and other components. I think we are here in an environment where there’s still a lot of money being put to work. I have to see if all these new trades will lead to investment in the US.

So the supply chains are changing. And so other companies are going to be bringing their manufacturing back to the US. Well, a strong dollar will indicate no, but if the dollar weakens, perhaps. So to me that’s one component. The geopolitics [has] to be taken at the currency level first. We’re in a currency war. I mean, trade wars, currency wars, there’s conflicts still out there, military conflicts — the South China Sea, what’s happening in Iran and Syria. I mean, the list is long.

So to me we live in unprecedented times, where we have … a lot of uncertainty. The Trump administration is redrawing the rules of engagement. How long are we going to be in this transitional period before something cracks? I don’t know, but what I do know is that the debt level is rising, they’re in unprecedented times and something’s got to give. And I don’t believe the world can handle high interest rates. So from that point of view, there is a very fine line — and even last week we’re seeing how the 10-year yield is starting to touch this mutual rate, and certainly what that brings me as an investor is a concern that the market need to start pricing in higher discount rates. And so the valuations involved with these companies will probably come down.

There is a natural equity sell off that we need to adjust the high cost of capital, and that would happen most likely through the multiples of all the equity stocks there. And in this environment, gold equities should do well because they have been so suppressed for so long and they have been the unloved children of this market. Soto me this is a definite environment where we should be adding to our compositions.

INN: And you mentioned something is going to crack at some point. There’s a basket of issues where it could be, but is there one thing in particular that you think will be the straw that breaks the camel’s back? Or is it still up in the air?

AM: I’m watching the renminbi/US exchange rates. I think that we keep reading how the US is concerned about their currency manipulators. Other industry experts point to the fact that the renminbi is most likely about 40 percent underappreciated vs. the dollar — [are all the powers going to] get together and renegotiate their currency and tax? I have no idea. This is something that could be the event that gold needs, but there’s going to be a resolution. There’s too much debt, there’s too much of economic interests and everybody wants to do their country the best, so we have watch and see.

INN: Do you have advice for gold investors or those looking to invest for gold?

AM: Be patient. Short-term cycles are very hard, especially with the passive investments, the ETFs and the swings are very dramatic … but gold investment is a longer cycle. If I look back at the 1930s, back in the 1930s you could buy a nice suit for US$16.95 and you could buy shoes for US$3.25, which is about US$20 dollars. This was the cost of about 1 ounce of gold back then. Today you can probably do the same and buy a man’s suit and shoes for about US$1,200 or C$1,500. And to me the preservation, that purchasing power that gold offers with wealth preservation is very, very strong.

So to me gold investments need to be taken regardless of longer trends, which are very positive for gold. And it’s very hard to call the in between, the shorter trading ranges. However, we have seen now an equity market that is eight-plus years long. This is the longest run in American history, and we’re due for a correction and in that correction gold will do well. So stay invested, this is the wrong time to sell your investments. And you have to look at the fundamentals.

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Securities Disclosure: I, Nicole Rashotte, hold no direct investment interest in any company mentioned in this article.  

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in contributed article. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.