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Gold faces new competition as real yields turn positive - USBWM
By: Neils Christensen | May 16, 2022

The gold market is finding some support at around $1,800 an ounce; however, according to one market strategist, the gold market faces some renewed competition through the rest of the year as the Federal Reserve raises interest rates aggressively.

In an interview with Kitco News, Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, said that while inflation might have peaked, there are indications that core inflation will remain elevated through 2022, creating a challenging environment for the economy and financial markets.

In the current environment, Haworth said that real assets remain an attractive hedge against inflation and market volatility.

"We've seen significant multiple compression in the equity market already, and that to our mind means we have to look for ways to pull forward our cash flows, and real assets have been a key way for us to do that," he said.

However, Haworth added that he doesn't see gold as an attractive real asset. He said he sees gold continuing to struggle through 2022 as the Federal Reserve looks to raise interest rates to potentially 3% by December.

The U.S. central bank has signaled that it could raise interest rates by 50-basis points in the next two weeks, and markets are pricing the potential for a 50-basis point move at the next three meetings.

Haworth explained that if inflation holds steady, rising nominal interest rates will mean that real interest rates will start to move higher.

"If we think about the last three years, one of the things that have helped gold has been negative, real interest rates. We don't have a whole curve in positive territory, but we're now starting to see some positive, real interest rates in that's going to start to pull some of that demand away from gold," he said. "Investors looking for a safe haven can now find that in some bond."

The only thing that could reverse gold's current downtrend is if the Federal Reserve was forced to halt and even reverse its current monetary policy plans, Haworth said.

However, he added that even if the economy slows, it should have enough momentum to avoid a recession. He said a strong U.S. labor market and healthy consumer demand support economic growth, albeit at lower levels.

"There's room for the economy to run," he said.

Although gold is not on Haworth's investment list, he said it makes sense for investors to have some commodities in their portfolios. He added that he likes the energy sector as he expects oil and gas prices to remain elevated.

However, at the top of his investment list is global infrastructure; USBWM is overweight these assets.

"There's this demand story creeping through. Even though global economic growth may be slower through the rest of the year, a further reopening from easing supply chains probably changes the demand story a little bit," he said.

Haworth said that there are mutual funds and ETFs that give investors exposure to global infrastructure like toll roads, airports, water treatment facilities, cell towers and data centers.

"We've been domestically biased for quite some time, but from an infrastructure perspective, there seem to be some benefits from being global," he said.

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