A portfolio manager suggests that despite ongoing short-term headwinds, the recent pullback in gold has created an attractive entry point for investors.
In an interview, Jerry Prior, Chief Operating Officer and Senior Portfolio Manager at KraneShares Mount Lucas Managed Futures Index Strategy ETF, stated that the drivers of gold's long-term bull market remain intact, particularly the global trend of moving away from the U.S. dollar as the dominant reserve asset.
Prior remarked, "I think given the current repricing in gold, this could be a fairly decent entry point. The long-term de-dollarization theme is structural, and I believe it will persist."
Gold has faced notable selling pressure in recent weeks as traders reacted to a more hawkish policy stance from Federal Reserve officials and as concerns surrounding the Middle East conflict have eased.
Prior noted that the recent decline has been driven by speculative investors, sovereign buyers, and systematic trend-following funds.
He added that given the extreme shift in speculative positioning, much of the downward pressure has already been absorbed by the market.
He said, "Perhaps the gold price will break below $4,000, but once oil starts flowing again, we will see some sovereign buying enter the gold market as central banks rebuild reserves."
Prior indicated that one of the most significant developments in the gold market over the past few years has been the growing desire of nations to diversify reserves away from dollar-denominated assets.
He described the "weaponization of the dollar" as a primary catalyst for central bank gold purchases and suggested this trend is unlikely to reverse.
He explained, "We believe much of gold's advance can be explained by this logic. Countries are seeking stores of value outside the dollar and U.S. Treasury market. If some countries produce more oil and revenues flow back in, we do not believe this capital will enter the U.S. Treasury market. We believe it will flow back into the gold market."
While remaining bullish on gold, Prior acknowledged that investors may face more volatility in the near term.
Sustained higher interest rates and successfully anchored inflation expectations could weigh on gold temporarily.
He also pointed out that gold has not always performed well during periods of high inflation, especially when higher rates increase the opportunity cost of holding a non-yielding asset.
However, he stated that investors should focus on the larger structural theme rather than short-term interest rate fluctuations.
He said, "Gold is a defensive asset in a portfolio. Most of the retail money that flowed into gold previously has likely been washed out, so at this stage, you're probably not going to get into a panic sell-off."
Prior added that the broader macroeconomic backdrop still supports a strategic allocation to gold.
He expects inflation to remain at a structurally higher level than pre-pandemic due to onshoring of manufacturing and supply chain reconfiguration, reversing the disinflationary trend brought by globalization over recent decades.
He explained that before the pandemic, imports from China helped developed economies suppress inflation, and this dynamic is now changing.
This makes it unlikely for inflation to return to the persistently low levels seen over the past 20 years, he noted.
Against this backdrop, Prior views the recent gold correction as more of a reset within a larger long-term uptrend rather than the beginning of a prolonged bear market.
Looking towards year-end, Prior said that with central bank demand re-emerging and structural de-dollarization trends continuing to support inflows into the precious metal, he expects the gold price to climb towards approximately $4,500.
He concluded, "I believe the structural de-dollarization theme, coupled with increased oil production in the Middle East, will bring buyers back. I think the gold price will slowly move higher from here."
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