Janus Henderson: A golden gift for Christmas?

While jewellery is a popular Christmas present, we do not think this will be the key driver of the gold price over the next month. Consumer demand tends to have a limited impact on the price of the yellow metal. Instead, we look to the US dollar and US Treasury real yields as the main influences. Having hovered around US$1,200 per troy ounce for several months, the foundations of a move higher are coming together.

Federal Reserve (Fed) Chair Powell spoke yesterday on the outlook for US monetary policy and it had an immediate impact on markets. He commented that interest rates are just below the level that many estimate to be ‘neutral’ – the point at which interest rates are neither stimulating nor restricting the economy. This suggests that there may not be many more rate increases from the current range of 2-2.25% as several Fed members have commented that they do not want to push interest rates much above the neutral level. This news pleased equity investors who have been worrying that higher rates could put an end to the economic cycle. Following his remarks, bonds rallied as fewer interest rate hikes were priced into US Treasury yields, particularly real yields.

The US dollar is now likely to become a focus. The world’s de facto reserve currency has appreciated as the Fed has raised interest rates while other central banks have kept their policy targets at ultra-low levels. An end to the US hiking cycle could spell the end of the greenback’s rise. There are clearly a number of other drivers that have influenced the currency’s upswing, such as the China/US trade war and companies repatriating offshore cash, but the consistent force in recent years has been the divergence in interest rates. Global investors have sought out the higher returns on offer in US assets, pushing up the exchange rate.

While the effects of stabilisation for the US dollar would have wide ranging ramifications, we are particularly interested in the implications for the price of gold. Gold is widely viewed as a diversifier for multi-asset portfolios, not because of any intrinsic mystical property of the shiny metal but, we believe, due to its relationship with the US currency and real Treasury yields. Powell’s comments suggest that the direction of both could become supportive in the coming months. We have added some gold to our portfolios in recent months in the expectation that we would be approaching a turning point. Perhaps Christmas is coming early this year.