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(Kitco News) – The Federal Reserve’s aggressive monetary policy stance has driven the US dollar to its highest level in more than two decades, which has taken a toll on commodity markets; however, one fund manager said that despite the recent volatility, investors should still be overweight commodities and half of that position should be in gold.
In an interview with Kitco News, Robert Minter, director of ETF Investment Strategy at abrdn, said that despite gold’s 9% drop this year, the price action has been impressive given where the US dollar and bonds yields are. He added that gold prices should be trading a lot closer to $1,000 an ounce than hold above $1,600.
“It’s stunning that gold is not lower,” he said. “Investors are finding reasons to hold gold despite the US dollar and interest rates.”
Minter added that what is holding gold back are all the investors on the sidelines waiting for global central bank policies to break the global economy. He said that we could already be at a breaking point after the Bank of Japan was forced, last week, to intervene in its currency market for the first time since 1998.
Many market analysts have added that the Bank of England could be forced to prop up its currency as the pound falls to its lowest level since the mid-1980s against the US dollar.
Minter added that with global economic conditions deteriorating, it will be difficult for the Federal Reserve to maintain its aggressive monetary policy stance.
“The Federal Reserve has already made a policy mistake and we are just waiting to see how bad the impact will be,” he said. “A lot of people are on the sidelines waiting for something to break and when they see that it has, they will turn to gold.”
Along with gold, Minter is bullish on the broader commodity index. He added a massive supply and demand imbalance in commodities like base metals, energy and agriculture will make them relatively immune to a global recession. He explained that even if a contraction in the worldwide economy dented demand for raw commodities, it won’t be enough to impact the systemic supply issues.
“All commodities are suffering from low inventories and weak investment in future production means those inventories won’t be filled anytime soon,” he said. “Look at aluminum, there is no aluminum to be had anywhere in the world and that goes the same for copper. It doesn’t matter where you look; there are supply constraints all over the world.”
Minter notes that base metal smelters, particularly in Europe, have reduced their output as energy prices have soared higher.
Along with base metals, Minter said he remains bullish on energy prices even as crude oil currently trades at around $76 a barrel, down 44% from its highs earlier this year, around $130 a barrel.
Minter said it would take a recession the size of the 2020 COVID-19 pandemic to bring energy demand down to impact long-term oil prices. He added that during the 2008 financial crisis, oil demand only dropped by 4%.
“It’s tough to dent oil demand unless you have a coordinated global lockdown, and no one’s going back to that,” he said.
In the current environment, as to how big of a commodity position investors should hold, Minter said that 20% wouldn’t be inappropriate.
Abrdn manages more than $500 billion along with a variety of exchange-traded products, including GLTR, which tracks a basket of precious metals and SGOL, its physical gold ETF. In broad-based commodities, the investment fund manages BCD, the abrdn Bloomberg All Commodity Longer-Dated Strategy K-1 Free ETF and the BCI, the abrdn All Commodity Strategy K-1 Free ETF.
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