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Updated 11:48 25/06/19

Wells Fargo: Gold rally will be short-lived

Liam Sheasby

By Liam Sheasby, News Editor

29 Oct 2018

American financial services firm Wells Fargo has said that gold’s recent rally will not last long, suggesting the latest stock market corrections are the only reason behind a gold resurgence. Earlier this month Wall Street experienced heavy losses, with the Dow Jones losing 800 points in one session to have its worst day in eight months.

The price of gold has risen from lows of £889 per ounce in the last few weeks to over £968 per ounce; a staggering rise of 7.13% driven by stock market losses as the US economy continues to receive interest rate rises to keep a lid on inflation.

John LaForge, Head of Real Asset Strategy for Wells Fargo, was speaking to CNBC about the company’s forecasts for the gold market, suggesting gold will take a backseat to stocks if interest returns to the US markets.

"We still have way too much supply even at $1,200 for gold" he told the broadcaster. "The longer-term outlook for gold is a little bit more of a sideways trade.

"We had a period from 2001 to 2011 where gold went from $250 an ounce all the way to almost $2,000. It brought out all kinds of supply. We had everyone and their mother out looking for gold in the world, and they found it. So, the price of gold has been sinking ever since."

Interest rate rises typically slow down an economy in the long run, which is why many investors have switched to gold to prepare themselves for any future financial rough patch. The US Treasury has also suffered a loss of interest in Treasury Bonds, forcing them to offer cheaper bonds to tempt investors to stick with them, with the promise of greater yields as a result of the discounts.

Tech stocks have been on a longer run of consistent value growth than that experienced for firms during the Dot Com Bubble in the late 90s/early 2000s, but with interest rate rises making loans more expensive to repay and, given a lot of market investment is based on borrowed money, this has forced investors to be more cautious with their speculation and commitment to certain stocks or shares due to the greater risk involved with current high fees of the popular tech shares – in particular those of Facebook, Apple, Netflix, and Google: the FANG companies.

LaForge said he thinks that stocks are merely correcting and as interest returns so will gold’s bearish tendencies, forecasting a three to five-year period before the excess supply of gold has been used up. French bankers Société Générale have already said they have little interest in gold at present, favouring what it believes to be undervalued silver bullion.

Gold’s future might not be so simple to predict however. The World Gold Council reported a 42% increase for year-on-year central bank gold reserves for Q1 2018, and an 8% increase overall for the first half of 2018 (H1). Hungary in particular made the news recently, having announced a tenfold increase in their gold reserves. Many nations have been switching to gold in an attempt to lessen any losses of value in the face of the strong US Dollar and pressures on other currencies.

Another bonus point for gold is the environmental impact. Again reported by the World Gold Council, gold mining has much less impact in terms of pollution and emissions compared to other metals and commodities, with CFO Terry Heymann suggesting that gold could prove to be a much more attractive asset as sustainable investing grows in popularity. Given that the UN Intergovernmental Panel on Climate Change (IPCC) reported that the planet has 12 years to urgently address global warming else risk permanent, devastating damage, gold’s popularity may defy the expectations of Wells Fargo as both a safe-haven asset and a responsible investment option.

You can watch Mr LaForge’s interview with CNBC below:

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