Gold: 'Fear premium,' institutional dollars needed to fuel rally

Gold (GC=F) has been on a tear driven by geopolitical tensions and the bullion's safe-haven appeal. Citigroup (C) is the latest in a lineup of Wall Street banks to upgrade its forecasts for the precious metal's price. Sprott Asset Management CEO John Ciampaglia and GraniteShares founder and CEO Will Rhind join Market Domination to discuss the primary drivers of gold's rise and future directions for the commodity.

On the magnitude of gold's strength, Ciampaglia states gold exited its slumber late last year after the Fed signaled a "pivot" was underway, a positive for gold as it competes with interest-bearing investments. Another key factor, Ciampaglia adds, is buying by central banks seeking to diversify away from US dollars as part of their overall foreign exchange mix. China is the leader in this particular de-dollarization strategy, Ciampaglia says, with Turkey, Singapore, and India following suit.

Noting gold's strength amid macro factors, Rhind believes gold could hit $3,000 per ounce if there is further unrest in the Middle East. The GraniteShares founder advises investors to play gold through its ETF for direct price exposure. Gold has unique attributes as a safe-haven asset, Ciampaglia says, balancing against traditional stocks and bonds during times of unrest.

Institutional investment in gold is lower at the moment, Ciampaglia adds, but if those dollars begin to enter the market, the commodity could be pushed to "new highs." The other "missing piece" in the gold market, Rhind says, is a "fear premium" that pushed the market to the highs observed in 2020.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This article was written by Gabriel Roy.

Video transcript

- Gold has been on a tear as of late. It's been driven by geopolitical tensions and the bullion safe haven appeal. Citigroup, the latest in a lineup of Wall Street banks to upgrade its forecast for the precious metals price. We're going to look at how to navigate the big picture with the Yahoo Finance Playbook. I'm joined by John Ciampaglia, Sprott Asset Management CEO and Sprott Inc. senior managing partner, and Will Rhind, GrainteShares founder and CEO. Guys, thanks so much for being here.

John, I want to ask you, first of all, what you think the primary drivers of gold's march upward have been because yes, there has been geopolitical tensions, but it's also been confounding to some in the market that we have seen the magnitude of strength that we've seen.

JOHN CIAMPAGLIA: Yeah. Thanks for having me. Well, I would say it really came out of its slumber back in late last year when the Fed clearly signaled that the pivot is underway. That has obviously been positive for gold as it does compete with other interest-bearing investments. But I would say the other more macro factor that's been driving gold over the last year and a half has actually been very steady buying by central banks around the world as they're basically diversifying away from US dollars as part of their overall foreign exchange mix, and China is really the leader there. They are buying record amounts of gold every month, and I think this is part of a de-dollarization strategy that they have.

Now other central banks are also following suit. Turkey, Singapore, Poland, India, they've all been big buyers of gold and even Chinese retail investors, as they've kind of run away from the property market which has blown up there, and the stock market hasn't really worked out. They're going back to traditional, cultural stores of value, which is gold. So I think all these things have helped gold kind of wake up over the last six, seven months.

- Will, I want to bring you in here as well and just get your take if you agree with John about just kind of the fundamental drivers here, Will, and also just where you think we think gold is headed from here. You know, Citigroup, I think they recently said, Will, they think gold is going to set to reach 3,000 an ounce over the next 6 to 18 months. That sound reasonable to you?

WILL RHIND: Yeah. So I agree with a lot of what John's saying. I think, just to add into that, what we've seen is there's some very large options positions in the market, so upside strikes of 2,500 upwards and certainly 3,000, which is also kind of another factor to add into this mix. But more broadly, could the price of gold go to 3,000 or higher this year? I think given the strength that we've seen and given the macro factors that John's talking about, I think that if we see some further unfortunately unrest in the Middle East, I think that could be possible.

- And so Will, if that's the case, if it's going to go higher, what is the best way to play it here? Is it to buy gold itself? Is it to try and play it through the miners, which have lagged? Which way would you look at?

WILL RHIND: Well, I mean, call me biased, but I obviously run a large gold ETF. So I'd say the best way to play it is through the gold ETFs, which give you the direct price exposure obviously. So very simply the price of gold goes up by 10%. If you buy a physical gold ETF, it goes up by 10%, also less the prorated fees. So it's an extremely efficient way to do it.

And one of the reasons why the miners are lagging. Clearly, not every miner is in this position, but it's the same as we've seen in previous cycles where it's difficult for these companies to handle these inflationary costs. And that's just something that as the gold price goes up, other vendors and other parts of the supply chain raise prices, and it's difficult for companies to manage that.

If you contrast that to, I mean, it might be a silly example but in something like the crypto world where you have the price of Bitcoin going to all time highs. Look at also the stocks like Coinbase performing incredibly well because they don't have the same kind of inflationary costs that you deal with in the real world in the mining sector.

- John, bringing you here. And same question to you, John. Your viewers who are listening right now, they want exposure to gold. What would you recommend, John?

JOHN CIAMPAGLIA: Yeah, well, we obviously are managing about $10 billion of fiscal gold on behalf of our clients. So we're big proponents. And gold has very unique attributes for our portfolio. It often acts as kind of a safe haven asset and a ballast against traditional stocks, and bonds, and periods of unrest. And the world obviously has been more unsettled the last couple of years between trade wars and wars and whatnot. And that's one of the reasons why people own gold in their portfolio.

As you started off at the beginning of the segment, gold stocks are very different. They're different animals. They're stocks. And so they tend to have correlation to overall the stock market, but they obviously have their own specific issues in terms of their production at their mines. And as well said, I mean, inflation in all industries has been very intense the last few years. Mining has not been spared in terms of key inputs and labor costs. That has eroded some of their profitability over the years.

But as this price of gold breaks out into new highs, that is obviously going to help them going forward. And I think that's why the gold stocks are performing a little better. We're not seeing widespread interest right now in terms of institutional investors chasing the momentum. And we think that if institutional investors return to gold, that could really act as a powerful catalyst to get to further new highs in the coming months.

- How much of it is it a risk, and Will, I'll take this one back to you, that the Fed doesn't start to cut rates, right? Because traditionally, higher rates have not been great news for gold, although perhaps anticipation of lower rates have helped fuel some of it this time, as well as that physical buying that you both have talked about. But Will, if the Fed doesn't cut, how much momentum can gold keep up?

WILL RHIND: I think it's a risk, but to me, it's more of a risk in the short term because then the question or the natural extension of that is what is the risk of them not cutting rates? And to me the risk of not cutting is greater than cutting. So to me, it just kicks the can down the road, so to speak, and we end up perhaps with bigger problems.

And to John's point, I think the missing piece here for the gold market is this big influx of investment dollars that we typically see, and obviously in 2020, we saw when gold hit an all time high. And the difference between now and then is we just don't have this fear premium in the market that we had back in 2020.

And yes. Of course, over the weekend, with the Iranian strikes on Israel, we've seen the gold price recover from the sell off on Friday and regain that strength and inject a bit of fear where some of the risk assets fell. But I think for gold to really get materially higher from here, we need that fear premium to come back into the market in a way that we've seen in the past. And that's really what motivates investors more than anything. So to me, a stock market dislocation is a breakdown because of perhaps policy or geopolitical reasons that sees gold go materially higher from here.

- And John, final question to you. I want to get your thoughts about silver. In your opinion, John, is silver poised set up here to follow gold higher?

JOHN CIAMPAGLIA: Yeah, great question because obviously run several silver funds as well. And the typical pattern with silver is gold is the leader. It breaks out first. And then within a few months, silver kind of takes charge and slingshots by. And we're starting to see that. It obviously has a lot more volatility than gold because it's not held by central banks. So buying pressure on silver can really move the price around shortly.

But silver is still way off its all time highs of back in 2010. It's incredibly cheap relative to gold. And we see very strong buying coming from India for silver as well as steady consumption of silver for the use of solar panels, which is being built out at record amounts around the world right now.

- John, Will, thank you guys both for joining the show today. Appreciate it.

WILL RHIND: Thank you.