Gold: How Much More Upside?
Featuring Ankit Sahni
Published on: August 29th, 2019 • Duration: 15 minutesAnkit Sahni, president and head of research at Exante Data, makes his Real Vision debut to break down gold’s recent rally. In this interview with Alex Rosenberg, Sahni explains the yellow metal’s relationship with real interest rates, examines how investors are currently positioned, and notes how much more upside he expects over the coming months. Filmed on August 27, 2019.
ALEX ROSENBERG: Welcome to Trade Ideas. I am Alex Rosenberg, here with Ankit Sahni, President and Head of Research at Exante Data. Ankit, thank you so much for joining us today.
ANKIT SAHNI: Thank you for having me.
ALEX ROSENBERG: Tell us a bit about yourself. This is your introduction to the Real Vision audience and let us know who you are and what you do.
ANKIT SAHNI: Yeah. I work at Exante Data where, like you said, I'm the Head of Research. So what that means is that I work on all parts of what the firm does. We're building a bunch of models to try to understand how financial markets work. As a firm, we're focused on basically making the macro investing process more data intensive. And so my background is a combination of engineering, I studied engineering. And then I spent 3 years working at a bank, 3 years working at a hedge fund. So it's like this hybrid background of engineering and finance.
And that's what we want to do in Exante, is that we want to bring a more math engineering type approach towards macro investing. And obviously, like, it's easier said than done. So there's like a million things that you can think about that you can quantify in terms of what's relevant for macro. And so we want to quantify as many of those as possible, and essentially help macro PMs have the highest quality data, and therefore make the best decisions.
ALEX ROSENBERG: So today, we are going to talk about gold. And before we get into where you see it going from here, if you could help us break down, gold is one of those assets, you can't say oh, earnings are really good. So if you could help us break down exactly what has led and contributed to this 20%-plus rise we've seen over the past 3 months.
ANKIT SAHNI: Absolutely. The way we think about gold is it's like a currency. So you can think of gold as being a currency which has no inflation and zero interest rates. So it's like zero real rates in terms of its currencies. How that works is that when the rest of the world has lower and lower real interest rates, that's positive for gold because gold's interest rates are not moving. So that's one big driver. When you think about how to have a framework for thinking about gold, the number one driver that you need to think about is what's happening with real rates globally.
And when you think about what's happening in that front, it's very clear what's going on. So coming into this year, the Fed hiked in December, they're expected to hike two more times this year. What's happened instead, they've cut in July, they're most likely going to cut again in September potentially by 50 basis points, based on the commentary that we're getting, based on what's priced in the market. From an inflation perspective, you actually might start to see some inflation picking up from a tariff's side.
So you essentially have a situation where nominal rates are going down, inflation is going up in the US. So real interest rates are going much, much lower. Similarly, what's going on in Europe, same idea, like 12 months ago, Draghi was potentially talking about at the end of summer 2019, we might be hiking rates. The meeting next week, we're probably going to get a very aggressive easing package where they're going to cut rates, they're going to do more QE, they're going to implement tearing to prevent bank losses, and so forth. So you have a situation where real interest rates globally have shifted much lower.
And there's an argument that that can continue, especially in the Eurozone, when you think about how the ownership structure of bunds and so forth has evolved, and we can talk about it a bit more. But the real interested argument, I would say, is one very major part of the whole thesis. The other part is on the flow side. And we can get into the drivers of some of these flows. So you look at, for example, reserve managers. In an attempt to move away from the dollar and move away from all this political risk, away from the sanctions, all of those things, Russia, Turkey, China, all these central banks have been buying very substantial amounts of gold.
So if you think about how much gold central banks purchase in the first half of 2019, that was the highest 6-month period basically since the 90s. So you have a situation where real rates are heading lower, you have flows that are positive. On the flow side, we also have some models that track what CTAs, which are basically systematic momentum type investors, what those guys are doing. And there again, the idea is they used to be short, and they've essentially covered all their short, bought a bunch, and now they're pretty much max long.
So you have a situation where there's been like a big shift where rates have moved lower, flows have improved. And then obviously, the more fuzzy element is what's going on with respect to distress sentiment more generally in this disruptive type world that we live in, like the Hong Kong protests, or what's going on in Italy, what's going on with Brexit. So all of those things work as a positive force for gold as well.
ALEX ROSENBERG: So that's what's brought us to where we are here with a 1550 gold price or so. Going forward, if we're to look at the next 3 months, will it be those general themes and will those trends continue? And that's where gold continue to rise from here?
ANKIT SAHNI: Yeah. So I think that comes down to thinking about whether what's going on is like secular or cyclical on some of the drivers that I spoke about. So when you think about what's going on in the world in a secular way, the way I look at the world, there's two main underlying themes that are going on in the world. I would say the first one is this deglobalization and you can call it populism protectionism, etc. And the second theme, I would say is too much saving. Some people like to phrase it as too much debt. And we can get into that conversation about which phrasing is right. And maybe it is worth spending a minute about that.
But the basic idea is if you have that situation with these two are the major drivers in a secular sense, then the underlying drivers for gold that I was talking about, they're persistently bullish. And so you can obviously have like, clearly had a very big move, and some of it was driven by some of that CTA type flow that I was talking about where the systematic movement of investors went from short to long. And obviously, that cannot continue because they've now bought what they can buy. So you will probably have a slower move, you'll possibly have larger pullbacks. But there is a very good argument that it can continue, like easily 10% to 15% more from here.
ALEX ROSENBERG: I do want to just touch on that distinction between debt and savings. How do you make sense of that? And why is that important for where gold is going?
ANKIT SAHNI: Yeah. The way to think about it is, as a first step, it's not a controversial statement at all to say there's too much debt in the world. Like, if you look at any measure, like in nominal terms, overall debt in the financial system that's over the past 20 years has tripled. If you look at it as a percent of GDP versus the early 80s, it's gone from like about 110% of global GDP to 220%. And this is non-financial debt so this is excluding banks. So it's clearly very large numbers that we're talking about, 220% of global GDP. So it's not controversial to say that too much debt. And I think that's relatively widely accepted.
The argument I'm making is that one person's debt, by definition, has to be someone else's saving, like if you're borrowing, someone has to lend to you. So if it's your debt, then it's that person's saving. So if you said there's too much debt, by definition, you have to also acknowledge that there's too much saving. And then we can think about what the correct phrasing is.
And so for that, we can think about the trend in interest rates. If you had a situation where people were borrowing too much, what would you expect with interest rates? You would expect them to go lower. And that's basically what we've seen since the 80s. You've had this big secular downtrend in nominal and real interest rates.
And that's part of what the Fed's problem is lower store and all that. But that's a secular trend that's been with us. And that is basically how it links back to gold as well. And that if what's driving this secular downtrend in interest rates is this underlying overarching force of too much saving, which, honestly, we're not close to doing anything about, then it stands to reason then that to the extent that lower real interest rates are bullish for gold, this is a secular trend, that argument should continue to hold in the future as well.
ALEX ROSENBERG: But I guess as you look back over the past several years, are you surprised that gold hasn't performed better given this dynamic? First of all, even if gold was something totally separate, lower interest rates and negative interest rates are clearly bullish for gold, because it's something that doesn't yield anything. But also, are you surprised that more money hasn't gone into gold rather than into bonds from the savers themselves?
ANKIT SAHNI: Yeah, I think that there is an element of that. So that's partly why the way we think about any of our trade thesis, you can't just have like a big macro theme and not look at the underlying flow drivers and so forth, to think about whether it's actually a tradable theme or not. So what's changed, I would say over the past 6 to 12 months, is some of these flows that I was talking about.
So for example, reserve managers, they have not been buying gold for an extended period. But the last three or four quarters, they've started to become buyers of gold more aggressively. And that's partly coming about because of what's going on in the populism side. So you have a situation where Russia are concerned that they will not be able to access their dollars, therefore, they want to reduce their reliance on the dollar. And therefore that starts to shift things towards other assets. They've bought CNY, they've bought gold, they bought euros, etc.
I guess what I'm saying is that, like some of this extra political uncertainty that's become associated with the dollar has played a role in all of this as well, because you have a situation where the dollar is still the world's reserve currency. But at the same time, you have a president in the US who's very keen to try to cause the dollar to weaken or generally cause instability to the extent that- if you remember, over the weekend, we had Mark Carney at Jackson Hole, the Bank of England governor, speaking about how the world needs to reduce its reliance on the dollar and how they are talking about possibly having like a coordinated liberal type currency.
So you have a situation where, like, there was a period 2014 to call it 2016, early '17, where the dollar was strong. That was because the US was doing fairly well. And in that period, gold will- generally speaking, do poorly if the dollar is the safe asset of choice. But then when you flip to this new Trump world, it starts to become relevant again that take these low negative real rates and the uncertainty all work to push hold higher.
ALEX ROSENBERG: As the as gold takes over as the reserve currency a little bit on the margins, you only need so much of the money that's held in dollars to flow into gold for it to be a really significant move price wise.
ANKIT SAHNI: Yeah, exactly. If you think about today's reserve managers manage over $11 trillion. That's a big number. And call it like-
ALEX ROSENBERG: So, it's not two and 20?
ANKIT SAHNI: Yeah. Well, I'm sure they wish that. At this point, they're making negatives. Until it's something like 60% to 65% of that is in dollars, whereas maybe 11% or so is in gold. So you're talking about like, you don't need for it to go from 11% to 50% for it to move. Even if it goes from 11% to 13%, 2% of $11 trillion is big for a market like gold.
ALEX ROSENBERG: So that brings us to the price. As I said about 1550 now, if you were to play this over the next 3 or 6 months, how would you think about how much upside there is in gold?
ANKIT SAHNI: Yeah. I would say like if you think back to 2011, the highs we got to, we're in this 1900 type range. So we're about 20% off those highs. That's one data point to think about. The other day, the point is we've had a pretty quick move, like you pointed out, we've had about a 20% move. So in some sense, like some of this thesis has already played out.
But when we look at our positioning indicators, so for example, when we look at how retail investors have invested into gold ETFs, they haven't. So that's like one catch up that's missing. I pointed out to you that our CTA models show that they've been aggressive buyers of gold, and they've gotten max long gold. But when we look at what they're likely to do, they're likely to stay long, they're not going to go ahead and sell these positions.
So there's like, you could argue that the acuteness of the move is gone, but the move should continue. So I would say something of the order of like a 10% to 15% move from here. So like a 1750 target that we're talking about. That kind of thing is probably quite reasonable in a 3 to 6-month timeframe. Having said that, like, I would say that there is a possibility that you will get some retracement.
So there's an argument to not add very aggressively here, but do it in a staged process, like you maybe do part of your position here. And if you get pulled back, keep adding. Because the underlying trend with a- you can say with a fairly substantial degree of confidence that it's good. So it's just about like timing at this point.
ALEX ROSENBERG: And position sizing really.
ANKIT SAHNI: Right, exactly.
ALEX ROSENBERG: Now, if there are risks to this trade, is it that global growth accelerates and the Fed gets back on track with hiking or what do you think is the single biggest risk here?
ANKIT SAHNI: I would say the single biggest risk of this is if fiscal policy change. So if you end up in a situation like if you think back to every everything I said, low rates, too much saving, etc., etc. The easiest solution to all of that is for governments to start to spend more and actually look to stimulate their economies and move away from this overreliance on central banks, which the central banks themselves acknowledge is not great.
So if that happens, yes, that's probably the single biggest red flag that you want to be aware of. Having said that, I'm not sure there's any clear signs that that's going to happen. Like you get these headlines occasionally that Germany's talking about doing some fiscal stimulus. And then it turns out that they could do it in an emergency. And then it turns out that the Bundesbank thinks that they don't need to. So we're not close to being in a situation where fiscal stimulus is realistic. But that would be the one big risk that I would keep an eye out on. If we're moving in that direction, then the thesis needs to be adjusted.
ALEX ROSENBERG: Very good. Ankit Sahni, thank you so much for joining us here on Real Vision.
ANKIT SAHNI: Thank you for having me.
ALEX ROSENBERG: Ankit is bullish on gold. He says the decline in real interest rates will continue to boost the yellow metal over the next 3 to 6 months. He's looking for a rise to about $1,750 per troy ounce.
For Real Vision, I'm Alex Rosenberg.