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Deep Dive With State Street’s Gold Guru

Gold prices have been on a tear, with the precious metal naturally proving a hot topic during last week’s Alternatives Symposium.

State Street has been the yellow metal’s ETF powerhouse from day one, offering both the largest and most liquid such ETF on the street, the SPDR Gold Shares (GLD), and the best-performing gold ETF this year, the SPDR Gold MiniShares Trust (GLDM). Both ETFs are up roughly 14%, with GLDM seeing the most inflows of all.

I caught up with George Milling-Stanley, chief gold strategist at State Street Global Advisors, following his appearance on our panel to glean a few more pearls of wisdom from the godfather of the precious metal’s analysis himself.

You mentioned on our panel that you’re constructive on the metal, but perhaps not as bullish as the rest of the Street. Can you elaborate?

Gold is already up around 15% year to date, and some on Wall Street are suggesting it could still have a further gain of 10%, 15%, or even 20% over the remainder of the year. I think those suggestions may be possible if the macroeconomic and geopolitical environment deteriorates substantially, but I am not going to predict that will happen. If the background remains unchanged, I would expect some gains in the price, but perhaps not as high as 20%.

If the Fed continues to push further delays in rate cuts, what impact do you expect for the precious metal and its ETF flows in the second half of 2024?

I think Jerome Powell continues to contend that the FOMC will allow future data on the economy, unemployment, and inflation to dictate the appropriate course of action. Market expectations have shifted from January’s position that there will be seven rate cuts in 2024 starting in March, to perhaps one or two in the second half of the year. As things stand, gold seems to be performing pretty well without any rate cuts, and I expect that situation to continue. When we see the reality of rate cuts, I expect the dollar to weaken further, and that should be helpful for the gold price. All else equal, gold ETFs should benefit from any increase in investor purchasing.

How successful has gold typically been as a hedge against inflation? The academic literature seems somewhat mixed here.

I think the academic literature is actually pretty clear on the issue, but some commentators have made unrealistic claims about gold’s relationship with inflation. Basically, gold is not a good a predictor of inflation, and it does not offer much protection against sudden sharp moves in the rate of inflation. Where gold comes into its own is when we experience sustained high inflation, which I define as at least two years of inflation above 5% a year. Whenever this has occurred over the past 50 years, the annual average increase in the gold price has been above 10%. That is the sort of protection gold has offered against sustained high inflation.

Some of our fellow advisors are concerned about lofty valuations. Is gold too expensive right now?

I believe that historically, the promise of gold for investors has a dual nature. Over time, a long-term strategic allocation to gold can help to enhance the returns of a properly balanced portfolio; and whatever direction the gold price is going, gold can reduce the volatility in a properly balanced portfolio. This suggests to me that there is really no bad time to seek access to the contributions a long-term strategic allocation to gold can make to a properly balanced portfolio.

From a global perspective, what’s the single most important source of demand to watch?

The current macroeconomic situation contains several aspects that increase investor anxiety over the outlook, notably sticky inflation, the possibility that Fed activity could precipitate a recession or at least a sustained period of below-trend growth, unsustainably high debt levels, etc. The current geopolitical situation also has several worrying features, notably a war in Ukraine that has the potential to turn nuclear, the spread of the conflict in the Middle East to include direct hostilities between Israel and Iran, China holding military exercises close to Taiwan, and an increasingly ugly presidential election in the U.S. Gold’s internal market dynamics also look favorable for higher prices, with strong demand for jewelry and investment in China, and India, and elsewhere in the world, and central bank net purchases for official reserves looking to be strong for a 15th straight year.

What would you say to those who argue the crypto craze/approval of spot bitcoin ETFs could be siphoning out some of the flows from gold and into crypto instead? 

The enhanced availability of crypto products may have absorbed some of the more speculative flows of investor money that might in earlier times have gone into gold, but I personally do not see cryptos offering a significant challenge to long-term strategic investment in gold.

You mentioned you took issue with one of the points made by your co-panelist (Paul Marino from GraniteShares). With which point did you disagree?

Paul was optimistic about the outlook for other commodities beside gold, especially copper. If my worst fears about the U.S. economy are realized, I do not share his optimism, as I would expect the commodity complex as a whole to suffer in a recession or period of slower growth, with the single exception of gold, which has frequently performed very well during bad economic times.

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