Gold is a nice defensive hedge: BMO's Carol Schleif

Key Concepts

• Gold as a Hedge: Gold's traditional role as a safe-haven asset and a hedge against inflation and market volatility.
• Central Bank Demand: The significant role of global central banks in driving gold prices.
• Asian Demand: The historical importance of demand from Asian markets for gold.
• ETF Buying: The recent surge in gold purchases through Exchange Traded Funds (ETFs), particularly in the US.
• Cost of Carry: The expenses associated with holding physical gold, such as storage and insurance.
• Psychological Hedge: Gold's function as an emotional or psychological comfort for investors.
• Crypto vs. Gold: The comparison between cryptocurrencies and gold as potential hedges and asset classes.
• Rebalancing: The strategy of adjusting portfolio allocations to maintain desired risk levels.
• US Bonds: The current market sentiment towards US bonds and their potential as a diversification tool.

Gold Market Shift: From Bullish to Cautious

This segment discusses a potential shift in the gold market, moving from a long-term bullish sentiment to a more cautious outlook. The discussion features Bob Elliot, CEO and CIO of Unlimited, and Carol Schlife, Private Wealth Chief Market Strategist.

Bob Elliot's Cautious Stance on Gold

• Key Point: Bob Elliot, previously bullish on gold, is now advising to "pair back and take those profits."
• Supporting Evidence:
  • Gold has experienced a "heck of a run" since trading below $2000.
  • A shift in market dynamics is observed:
    • Strong US ETF Buying: Recent weeks have seen some of the strongest gold buying in the US through ETFs and other mechanisms.
    • Central Bank Pullback: Global central banks are reportedly "pairing back their buying."
    • Weak Asian Demand: Demand in the East is "pretty weak relative to normal levels" for this time of year.
  • This composition of demand is "a little more concerning" for the forward-looking picture of gold.
• Actionable Insight: For investors who are "100% in the money on this trade over the last year or two," it is time to "take a little bit of profits."

Carol Schlife on Gold's Movement and Portfolio Role

• Key Point: Gold tends to move differently from other commodities, and its recent surge might be a reversal in progress.
• Supporting Evidence:
  • Gold's movement is distinct from other commodities.
  • In prior periods, when investors "piled into it, especially towards the end," it has reversed course "pretty quickly."
  • The recent surge is partly attributed to hedging against market volatility and gains made elsewhere.
• Gold's Portfolio Function:
  • Owning gold is a "different part of a portfolio" because it does not generate income.
  • It acts as a "psychological hedge" in individual portfolios.
  • There is a "cost of carry" when owning physical gold bars, which is a factor to consider.

Crypto vs. Gold: A Comparative Perspective

• Key Point: The recent shine of gold raises questions about its role compared to cryptocurrencies.
• Carol Schlife's Perspective:
  • People are still trying to understand crypto: "Is it a currency? Is it a hedge?"
  • Many have equated crypto with gold, but its performance, especially after market close and through the weekend/week, suggests it is "not performing that hedge yet."
  • The nature of crypto (speculation, asset class, currency) is still being determined, and it has not yet settled into a "rhythm."

Rebalancing and Diversification Strategies

• Bob Elliot's Advice on Profit Taking:
  • Quantification: At a minimum, investors should consider "taking that original 10% of your portfolio, which is now considerably more in gold, and pairing that back and rebalancing back."
  • Sentiment Shift: The current situation where "everyone's talking about gold" and buying "hand over fist" indicates a potential late-stage buying frenzy.
• Diversification into US Bonds:
  • Compelling Option: Rebalancing out of gold and into US bonds is presented as a "most compelling diversification option."
  • Rationale: US bonds are currently at "more than 10-year lows," making them potentially the "most hated asset in the world today."
  • Strategic Investing: Being an "effective strategic investor" involves not getting "over your skis on the thing that's just gone up" and taking opportunities to diversify.

Conclusion/Synthesis

The discussion highlights a significant shift in sentiment regarding gold. While gold has had a strong run, driven by US ETF buying, a slowdown in central bank purchases and weak Asian demand suggest a potential reversal. Bob Elliot advises taking profits and rebalancing portfolios, particularly by considering US bonds as a diversification strategy. Carol Schlife emphasizes gold's unique role as a psychological hedge and contrasts its performance with the still-evolving nature of cryptocurrencies. The core takeaway is the importance of strategic rebalancing and avoiding overexposure to assets that have experienced rapid gains.