Gold has broken a critical support level, but there is not much downside left, said Alain Corbani, portfolio manager of Finance SA, who forecasts $2,500 an ounce for gold's upside target. The metal will be caught between conflicting macroeconomic forces next year: slightly higher negative real interest rates, but a weakening U.S. dollar. While gold has a negative correlation with negative real rates, ultimately, the dollar will prevail as the dominant driver of gold during this current phase of the commodity cycle.
Well that in core bond portfolio manager, our global gold and precious that finance essay joins us today to talk about the gold price and the factors behind this drop that we're seeing. I'll then it's good to speak to you. And, uh, welcome back to Kitco. Thank you very much, David it's uh, it's good to be able to share with you our thoughts today, seeing a drop in the gold price.
Now this drop is nothing new. We've been seeing drops consistently over the last few days, two weeks, but, uh, today's especially bad. Uh, sparkled is down more than $30. Now that equities indices have not moved up very much. So the NASDAQ is up. Less than 1%. And the other indices, the Dow Jones and the S and P 500 are up less than 0.5% as of 10:30 AM Eastern time.
So I don't know if I would call this a risk on sentiment. Hmm. Well, uh, I agree with you that, uh, Gold has been, uh, heading, uh, lower for the last, actually for the last three months, because the peak, the peak in the gold price was in August and, and you're right, who are really close to, uh, two very important support levels for gold.
Um, and what is, what is actually, uh, very comforting is that gold mines are not following. I mean, I don't know, I'm not in front of my screens right now, but, uh, half an hour ago, uh, uh, those gold mines were not following the price of gold. So this is, this is a comforting message that they're sending. And the second point that I would like to make is that don't forget that today is, uh, Thanksgiving, Friday that, uh, it's half a day of trading, uh, in the U S and, uh, and there are there's hardly any volume.
So I wouldn't give much meaning to what is happening today. Uh, it will be, uh, we'll have a much clearer picture on Monday when everybody will be back to work. You mentioned support levels. Can you tell us what those support levels are? Yes. Uh, actually, uh, the main, main support level is 1794. Uh, and I know for the price of gold and, uh, and I know that, uh, we were at 1775, 1780.
Yeah. It's broken down below that now it's 1782 now. But this is, this, this doesn't, you know, mean much again. Um, we don't, we cannot have such a narrow view on the price of gold. You might have an excess on the downside. Absolutely. But, but the reality is that, um, the fundamentals for gold. Are still intact to see it go higher.
And remember, uh, I mean, along this road, the five-year of that bull market from the end of 2015 to 2020, uh, the road and the line was not strict. We had many, many, many incidents along the road, but look at what, what w where we are now, we are basically, uh, 50% higher and, and, and the direction, the trend is still the same.
Again, we'll have hurdles and we are facing one right now because. The market is expecting higher rates and rightfully so. And, uh, and this is why we have a rotation towards more cyclical, cyclical names. Okay. Before we talk about the economy, I'd like to get your macro picture, but let's talk about the gold price direction a little bit more.
This trend that we're seeing, it's broken this port level you're mentioned, uh, does that mean we're in a short-term bear trend? Could it go even lower right now? I think that's what short-term traders and some investors would like to know. Uh, I, I really, uh, I mean, our, our, uh, work is, is really on a, on a midterm, uh, basis, but I, but I will, I will answer your question for the short term.
Um, we don't believe that we are going to go, uh, lower. We don't, uh, and, uh, The proof of that is that, uh, we were indeed, uh, very defensive, uh, over the last couple of months. And in the fund today, we are a hundred percent invested. So we do recognize the fact that we have reached those support levels. Maybe we are going to break them.
Uh, we'll wait for next week. If we do break them, we might have another, uh, like downward leg, but you know what? This will be an opportunity to, uh, to average down for those who can average down. But I truly don't believe that those rates will have the potential to go much higher. And I really do believe.
That the next phase of this will cycle we'll rely on a lower us dollar. And this is, this is really the main, main, the key factor that will, uh, allow the, the, the price of gold tool to move much, much higher. You mentioned that gold has been responding to more confidence in the economy. What are the indicators that you've seen that are showing you that the economy is getting better?
Well, first of all, you have the quarterly, uh, macro figures about GDP. So, uh, from the major recession, uh, whether you enter your lysate or you just take the quarter, uh, we had, we had one of the worst recession ever, and, uh, in less than three months, we recouped those losses. That's that's, that's what I call a V-shaped recovery.
Now. Uh, Q3 was, was positive. Q4 is going to be positive. The only unknown is Q1 2021 because of the, uh, what is happening on, on, on the virus front with a lot of, a lot of cases, uh, rising positive cases, rising, but only no. We have, there is a major, major, uh, trigger, uh, uh, event that, that allowed the markets to become very, very optimistic.
It's of course those vaccines. Well, those vaccines were, were really the, uh, the key ingredient that allowed everybody to turn sub to turn suddenly positive. And this is exactly what happened from a really, really deep, depressed, uh, uh, perception, the market. Maybe, maybe. Have been a little bit too complacent with, uh, with, uh, the, the potential of those vaccines to, uh, to solve our problems.
But the reality is that if you look at some sub sectors of the S and P 500, well, look at the airlines, the airlines are up, uh, more than 30% in, less than a month, uh, mind you from very low level. But the reality is that there is a rotation that is taking place. I think that this rotation is, is, is, uh, Uh, well deserved, uh, at the expense of, of the price of gold, but this is not a rotation that is going.
To, to be, uh, to last, very long, just because of, uh, the, the, the nature of, uh, of our cycle. I w I will briefly, briefly, and maybe you will want to, uh, um, maybe to ask other questions, but yeah. But the configuration of, uh, of, uh, our positioning in the cycle today is really identical to what happened in the previous bull cycle from 2001 to 2011, basically five years down the road.
David from 2001 to 2005 real rates went down and gold went up and it was an, and there was growth, uh, everywhere. So, uh, gold reacted. In the first phase of the bull cycle, the gold reacted to, uh, lower win rates. And it's exactly what happened from 2016 to 2020. The only, only key ingredient that pushed the price of gold higher was lower.
Real rates of course, were with the virus. Things got really, really, uh, Worse than, than what they could or should have been. But the reality is that the second phase of that bull cycle will depend on the direction of the price of the U S currency and all. Well, all the elements are in actually have never been better to give us a level of comfort, to be convinced that the next phase we'll see a lower us currency and a higher, yeah.
So you mentioned from 2001 to 2005. Is a, what this cycle looks like in 2001, I'm looking at historical prices. It was around $400. By 2006, it has reached $600, 500 to $600. So that's about two, three times growth. Are you saying we're going to reach two, three times quilt in the next five years. I'm I'm I'm saying that, uh, we did indeed in the year, 2006, that saw actually higher rates.
And again, this was absolutely logical to have higher rates because the economy was, was getting better, was getting on its feet, back on its feet. And again, we are in this. Configuration where from a recession, we are moving towards more growth with huge, huge, huge imbalances. And these imbalances are going to allow the price of gold to go higher.
And between 2005 and 2006, when rates went up, if you look at your, uh, your screen, the dollar went down, so we don't need to have higher rates. To have a lower gold price. We today need a lower us currency. So you mentioned that the, uh, confidence in the economy is returning. If the economy is improving, uh, Len, why would the rates still stay low?
Why wouldn't the federal reserve raise rates? It's exactly what I'm saying. I think that, well, two things rates today are abnormally low. Abnormally low and they are low because the central banks have been, uh, extremely, extremely aggressive in their monetary policy. And they said it all, all the central banks, they said it all over the world that they are going to keep those rates low, as long as they reach.
Uh, level of employment that is acceptable and a level of inflation that could evolve around the 2%. Now, now, actually it could be much higher than that, and we might never get there actually. But anyway, the reality is that. The central banks are putting a lit on higher rates by their purchases of assets.
That's number one, but it doesn't mean that the rates are not going to readjust. And I think that those rates are going through red, just. In the next few weeks and months, and we've seen it already. So, and it's absolutely normal to adjust to because the new there is a new configuration and that configuration is in favor of more growth.
So of course rates will go up, but they will go up marginally. And the fact that they are good going up and that the us dollar is not hasn't really started. Its descent makes the perfect storm for the price of gold in the short term. W what's uh, yeah. If I were to give you three variables, uh, which of these has the strongest negative.
Correlation with gold, uh, most consistent negative correlation with gold. The first one is the U S dollar, which you've mentioned. The second one is a real rates and a third one is inflation. Well, I would disagree with inflation because, uh, because rates incorporate the, the, the, uh, the aggregate, the finesse of inflation.
But, uh, but actually if history is your guide, the highest negative correlation with the price of gold is real rates. Followed by the U S currency. Okay. So, but I already explained because I want to be very clear and I don't think that that, that I've been clear enough in a bull cycle. You have two phases, at least two phases.
The first one is, is based on lower real rates. The second phase usually happens with a lower currency. And we are in that phase. We are starting, we are, we are hardly starting entering this new second phase where we should see a lower usage currency, right. Slightly and slightly higher rates and slightly higher real rates, literally because we are, uh, in, in a growth, uh, because the economy is showing some, some strength at the real rates.
Is it, uh, negatively correlated with gold or positive the correlated with gold negatively, but you think real rates will rise? Yes. So, so gold will go down, but again, on the margin. Okay. And they are going to rise on the margin because as you said, it nominal rates. We expect normal rates to slightly readjust to the upside and they are readjusting to the upside because we have an economy that is opening.
Okay. So LN. So talking about the variables that will affect gold the most, I'm guessing then if you think real rates will go up, but gold will also go up. Then the dollar must be a stronger force for gold next year, because you think the dollar will go down. This is exactly it. This is exactly it. Again, first of all, real rates going lower pushing gold, higher followed by a us currency that will weaken.
That will be the main element key element to drive it. And to, to clarify, uh, real rates will go up, but it's still going to be a negative territory, right? Yes, our flat maybe, but I think they would remain negative. I mean, in Europe they are negative all over the world. They are negative. It's just in the U S they are slightly positive.
Um, and Japan, but, uh, the reality is that we're going to. Evolve for very long period of time, you know, the environment of very low, real and normal interest rates. One last thing I don't know who said at the federal level that they were not thinking about thinking about the idea to raise interest rates.
So it's official rates. Uh, will not go up, uh, because the central banks and the fed that's the first emotion the fed will not. And they said it will not raise rates before 20, 23 and most, probably 2024. So let's talk about the real rates. You said that. Okay. So I know, so you think the U S dollar is going to, is going to, uh, is going to weaken, right?
Yes. Okay. So we, so we know that that's bullish for gold. So the real rate, you said that the nominal rate is likely to rise a little bit, not too much, but a little bit. So the real rate is the nominal rate minus the inflation. So if you think that the real rate is going go up yes. Nominal, that means that means you must think inflation isn't going anywhere.
Exactly. Exactly. Okay. I believe we had this SketchUp in inflation expectation. We have we've had it. Uh, if you recall, uh, inflation expectations when we hit that recession in, in Q2 were almost equal to 0.2 0.3%. And we went back to 1.7, 5% today, so that the catch-up in inflation anticipation is, is already, uh, in, in the price of all the assets.
What we don't know is what kind of inflation are we going to have? Uh, in 2021, 22 and down the road. Okay. I, you know, I live in Montreal, we're still in lockdown. And, uh, when I go out, the restaurants are closed. I can still get takeout so I can still see the prices. And I noticed the prices for these. A lot of the stores, restaurants, groceries have gone up, uh, the CPI index.
If you look at the food component has gone up. So that, that supports what I've observed in my real life. Now, my theory is that as the volume of sales has decreased, uh, businesses have no choice, but to increase their margins. To support to support themselves because they cannot sustain themselves on just volume, alone.
Volume has declined. And I don't know how you think about a volume of sales going forward, but if, if you think that we're going to see more lockdowns, maybe the button administration wants to lock that lock is locked, the American's down again. Then the volume of sales is not going to increase. And so they must raise prices to sustain themselves.
What do you think. Well, th the, the favorite, uh, reference, uh, of the fed, uh, to, uh, to study inflation is the PCE and not the CPI. Uh, and, and usually as you know, we always, uh, segregate the CPI and CPI ex food and, and, and energy. Um, so I wouldn't give it. Too much, uh, uh, wait in my, uh, in my analysis of where inflation is heading, because, because we are still today in a mode where the vaccines are coming, they are going to allow the economy to reopen and then our people to go back to work and, uh, Again, get their jobs back and start consuming again.
So, uh, this is, this is the, the, the clear, uh, scenario that, that, that we're favoring today. Okay. So let's put all this together then, uh, then, uh, gold prices for the next two years. Uh, one to two years outlook. Do you see it going up much more or around the same or down? No. No, we. You see, uh, the price of gold is going to go higher.
Uh, and, and probably 2,500 is, is an easy, it's an easy target. Uh, and the reason is, again, very simple. It's based on facts. W we, we. I stated that we expect the U S currency to weaken. I didn't explain why it was going to weaken. And that's very important for the, for the viewers. The, we have massive, massive, uh, twin deficits.
They are worsening and we have a debt to GDP that is hitting records every day. So no matter how we turn it, if we just focus on the macro, the fundamental macro. We can ink structural, uh, we can Instructure imbalances can only lead to a weaker currency. So the, the second leg up of the gold price is probably dependent on a lower us currency.
This obviously, uh, assumes that we are not hitting another major hurdle and we're not going back into a recession next year. All right. So a lower currency is going to drive the gold price. Alright, perfect. Two $2,500. Is your forecast? Yes. Okay. All right, Alana, thank you very much for, uh, clarifying what's going on today.
I appreciate it. It's a pleasure. And thank you for watching kiszko news. Stay tuned. Have a happy Thanksgiving. .