There were two notable bullish calls for the yellow metal this past week. One was from hedge fund manager, Paul Tudor Jones, and the other from DoubleLine Capital founder, Jeffrey Gundlach, who is regarded by some as the ‘bond king’ for his past forecasts.
Their investment outlooks for gold were related and echoing other large-scale investors over the past couple months. In Jones case, it’s based on the belief of the possibility the US could be headed for recession. In Gundlach’s case, after accurately forecasting the volatility in fixed income markets over the last couple months, he now sees a lower priced US dollar by year-end. The lower dollar will be the result of a US recession, interest rate cuts from the US Federal Reserve, and a towering US fiscal deficit.
These calls coincide with markets this week moving on investor expectations the US Federal Reserve will cut interest rates 3 times by year’s end. What’s head-shaking is how quickly this shift has taken place from the US Federal Reserve’s hawkish bias that was much more present into the beginning of 2019. At the close of markets Friday, investors were pricing in 68% odds of a rate cut at the Fed’s July meeting, and then two subsequent cuts by the end of the year.
What gives me pause during weeks like this, coinciding with a regain in confidence in the recent turmoil in equity markets, is asking the question, what’s changed?
Fed Chair Jerome Powell may have had his Mario Draghi moment a couple weeks back, when in a similar scenario back in 2012, European Central Bank President Draghi pledged to do “whatever it takes” to save the euro. What followed was President Trump’s threat of additional tariffs on $300 bln worth of Chinese imports to the United States. Alas, the US President may have succeeded in his wish that the US central bank, that’s supposed to remain apolitical, may be shifting to his corner in this escalating trade war.
Towards the end of the week, China’s economy showed continuing signs of softening. Manufacturing data for industrial output experience the slowest growth in 17 years as their export sector now shows clear signs of the impact and damage of US tariffs. Still, stimulus measures announced by the People’s Bank of China signal the Chinese government stands ready to dig in their heels. There is no shift in sentiment yet that tensions will ease between the world’s two superpowers, and thus the calls for a demand for safe-haven assets like gold.
Jones had a simple way of justifying his market outlook. To paraphrase, the cooperation and policies towards globalization and increases in global trade that fueled economic growth for the past 75 years are coming to an end. His forecast is for gold to take out $1400 US/oz and then not to wait too long to see $1700 US/oz. In some regards, it resembles a fearmongering depiction of the world, but it seems this scenario is becoming a little more prevalent again.