Is It Finally Gold’s Time To Shine?

After a year of lackluster performance, gold might be headed for a turnaround.

Robert Minter is the director of ETF Investment Strategy at abrdn. Abrdn’s suite of ETFs focuses on commodities, particularly precious and industrial metals. 
 
As inflation heats up, commodities have come into sharp focus this year. In part one of this Q&A, Minter shares his thoughts on gold’s disappointing year and brighter outlook, as well as recent market volatility.  
 
The following transcript has been edited for clarity and brevity. 

ETF.com: Gold is generally viewed as an inflation hedge, but when we look at the performance of gold-related ETFs such as the Aberdeen Standard Physical Gold Shares ETF (SGOL), they haven't performed as expected over the past year. Why do you think that is? 

Robert Minter: There were two significant head winds to gold last year.  

The first was that a big portion of demand comes from retail purchasers, and those are highly concentrated in China and India. Gold is used as a traditional gift during festivals and weddings, and they had the same problem holding festivals and weddings as everyone in the world over last year.  

This year, the wedding industry experts in the U.S. [predict] we’ll see 2.6 million weddings in the U.S. this year, which would be a new record. Something like 50% of the weddings were postponed in 2020. 

If you hold more festivals, hold more weddings, there'll be more retail demand. So that head wind has gone away. 

The second and bigger head wind last year was that crypto took all the energy out of the room. Last year on the first business day, I had so many emails about crypto. I think that's all everyone talked about over the prior holiday season.  

[Crypto] really has some problems—those will be regulatory. If you think about it, [given] all the regulations that our industry has to ensure public confidence in the operation of markets, the fact that a really large asset base can operate outside of those regulations doesn't fit with the model that regulators are putting investors and investment houses through. 

After the presidential administration turned last year, it takes about a year for all the agencies to get staffed; they're all staffed up now. You can see they have a tremendous set of agenda items. They're looking into crypto, SPACs, NFTs, meme stocks, etc., which are all fair game, and need to have guardrails put on them to ensure public confidence. 

And for crypto, that’s long overdue, so we think that head wind is gone as well.  

Crypto has had this marketing that it's an inflation hedge. As we all become more familiar with how the price works and get some actual history in crypto, we can see, no, it’s not an inflation hedge. Is it a hedge versus the U.S. dollar? No, it hasn't been. Is it an uncorrelated asset? No, it's actually most correlated to small cap tech names—hardly uncorrelated to the market. It’s a pure digital asset sentiment indicator.  

Those two issues from last year are abating. Our view is that we'll start to see gold perform like you’d expect. Historically when the Fed raises rates, it means higher gold prices.  

ETF.com: What factors do you think are feeding into this rapid swing that we've seen from risk-on to a risk-off market? 

Minter: When you start to have a discount rate that’s higher than zero, then when you’are actually paid earnings from companies that you own actually matters. If you're expecting earnings this year versus earnings in 10 or 20 years, it makes a very big difference.  

When the discount rate is zero, it largely doesn't matter whether you get payback this year or in 10 years. But if that’s non-zero, the earnings that happen further into the future are worth less than the earnings that happen right now. 

[There’s] a focus on companies that are providing so-called value stocks. The additional factor flowing into this is that a lot of commodity stocks are classified as value stocks. Part of the shift is from growth to value. Part of the shift is from noncommodity stocks toward commodity stocks. There are multiple facets there. 

As far as the risk-off mentality, there are plenty of things to worry about in the world: geopolitics, rate hikes and lack of faith in what the Federal Reserve is doing.  

In 2020, they told us no inflation; there was inflation. In 2021, they said inflation would be transitory; it was obviously not transitory. And now they’are guiding the market to needing to offset 7%-plus inflation, which is probably also wrong. A big portion of that inflation really is transitory. Used cars are a big portion of that 7% CPI inflation. And that's most likely temporary. 

But the very real labor shortage is not temporary. And from our perspective, there are 2 million missing foreign-born workers in the U.S. That's partially because of the prior administration's immigration policies, but also the current administration has not reversed many of those policies. And there still are COVID restrictions. 

We're missing 2 million foreign-born workers, and 3 million early retirees have left the workforce. That probably should have been able to be predicted. With 5 million missing people from the workforce, it's evident here in every single store that you go into that there's a labor issue.  

The problem is, what does a rate rise really do to lower inflation? Does it help a company automate some process within production in order to replace a human worker? No, it actually makes it more expensive to do that.  

It also doesn’t evaporate the increase in domestic savings accounts from the stimulus. That money is there. It doesn't evaporate. If what we're trying to do is offset some of the energy price increases, it does absolutely nothing. Better energy policy would help inflation on that front, but higher interest rates in and of themselves would not.  

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