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April Market Minute

Replay of the Gold Outlook Webinar

Chantelle Schieven, Capitalight Research Managing Director, moderated the 6ix Mix's Gold Outlook Panel on April 3.

Click here and tune in at 2h 30m to watch the full panel discussion.

First Quarter Review and Outlook

The first quarter of 2023 proved to be a wild ride. The year started with equities climbing, which the stellar January employment report released on February 3 put a damper on as markets recalibrated for sharper interest rate increases from central banks. Then that recalibration was turned on its head on March 10 when Silicon Valley Bank went bust. The Federal Reserve, US Treasury and FDIC all stepped into guaranteed depositors of SVB. They also created new facilities to loan to banks at par against US Treasuries that have lost value as interest rates rose.

The S&P 500 ended March with a gain of 1.6% and up 7.0% year-to-date. Of course, not all sectors performed well, the Financials sector declined more than 10% (the regional small bank index is down more than 30%), with the Energy, Material, Industrials, and Real Estate Sectors all negative in March. The TSX didn’t fair quite as well with a decline of 2.3% for March, due to its large weighting of Financials and Energy sectors but is still a positive year to date. Despite the banking sector turmoil, the Federal Reserve hiked interest rates 25 basis points, (this was less than the 50 basis points expected earlier in the month) and is expected to hike another 25 basis points at its May 2-3 meeting before pausing. The Bank of Canada took the hold-and-see approach at its March 8 meeting. Our baseline forecasts call for both banks to ease policy rates by the end of the year to support their respective ailing economies. If markets do calm down a recalibration towards higher interest rates is likely. However, the economic and financial environment is likely to continue to have some major speed bumps as the effect of the rapid rise in interest rates fully takes hold. As a last note, during this volatile time, we remind readers of Martin Murenbeeld’s quote “Have some gold in your portfolio and hope it doesn’t go up!

The US Dollar as a Reserve Currency

The section below is an excerpt from the Gold Monitor on the US Dollar as a Reserve Currency. There has been a significant increase in articles and reports on the future of the US dollar as a reserve currency – notably in the wake of US financial sanctions on Russia after it invaded Ukraine. The unintended consequences of US sanctions include a perceptible shift of dollar reserves into non-dollar reserves by some (neutral/non-western) countries, including into gold and non-western currencies such as the Chinese yuan.

It’s not sure the US could have prevented this shift, unless it chose not to use financial sanctions in its efforts to force Russia to abort its invasion of Ukraine. Regardless, the long-term reality is that as China becomes an increasingly more dominant economic and political power, the renminbi is destined to become a more important invoicing currency (for trade with China, in the first instance) and potentially a more important reserve currency.

The two charts below highlight the dominance of the US dollar in global reserves in recent decades. The long-term trend is mildly downward, which is expected when new economic powers – China, India – are emerging, and their respective currencies become more useful invoicing currencies in global trade.

But replacing the dollar as the world's primary reserve currency will be a slow process. A global reserve currency requires open capital markets that are globally accessible and free of political interference and restrictive legislation. The renminbi is a heavily controlled currency, making it unsuitable for other than an expedient invoicing currency (i.e. for trade

between Russia and China) – at least for now. I cannot foresee the day when a communist government in China will allow laissez-faire capital markets to flourish (something that usually comes only with democracy). (If China wanted to directly attack the US financial and economic dominance, and usurp the dollar as the primary global reserve currency, it would now be fully de-controlling its capital markets and adopting completely the WTO rules it signed up for back in 2001! But just how likely is this?)

Yet, there is no denying that some countries want an alternative to dollar reserves. And that means an increased demand for gold, the historic reserve asset. Central banks are buying gold again, and we do not see this demand diminishing in the coming decades! The non-dollar-reserve alternatives to gold reserves are few when emerging-economy currencies are tightly controlled.

Gold Approaching All-Time Highs

Gold set its all-time high of US$2067.15 on August 6, 2020 (LBMA PM price. Gold is close to testing this high – closing on April 6 at US$2030.82. The recent surge in the gold price is in response to banking sector problems, a weaker US dollar, softer economic and labour market data, and declining yields. There are many economic and financial factors that are positive for gold in coming quarters.

These factors include:

1. Continuing banking sector concerns

2. Record central bank gold buying (the Peoples Bank of China reported and increase gold holdings by 24.9 tons in February)

3. Weaking US dollar

4. Geopolitical crises are everywhere

5. Continued de-dollarization

6. Central bank policy turning more dovish in coming quarters.

Bonus Tip:

Exposure to precious metals is a great way to help diversify your portfolio!

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