The Gold Market Is a Wildfire Waiting to Happen

(October 27, 2016 - by Neils Christensen)

One major international global asset management firm says conditions are perfect for gold prices, comparing the market to a potential wildfire that is just waiting for the right spark.

In an exclusive interview with Kitco News, John Lambert, investment director at GAM -- an investment firm with more than $119 billion in assets under management -- said that he sees a number of catalysts that will re-ignite gold’s uptrend.

“It doesn’t really matter what the specific catalyst will be. Gold has the potential to move higher,” he said.

One significant spark that Lambert said he sees in the near term could be potential U.S. dollar weakness, adding that the greenback’s current strength is based on “fiction.”

Although the U.S. dollar has lost some ground, prices remain near seven-month highs. The greenback has remained fairly resilient because of Federal Reserve posturing, but Lambert said that it could soon change as it becomes clear that interest rates will remain lower for longer.

“It’s impossible for interest rates to go up substantially,” he said. “Like it or not, we are in a world of trending lower economic growth.”

Not only will the U.S. dollar suffer because of low interest rates, Lambert said that global central bank monetary policy has gone as far as it can go and now governments are trying to boost economic growth through fiscal policies. However, he said that this will only result in higher debt levels.

The response to stagnant growth and higher debt levels could eventually lead to higher inflation, which will ultimately be positive for gold.

Another factor that could drive gold prices higher next year is geopolitical uncertainty as Europe faces a number of contentious issues like Italy’s constitutional referendum, elections in France and Germany and continued fallout from the Brexit referendum.

Brexit, Lambert said, was the first domino to fall, highlighting rising discontent for globalization. He added that it is still unclear what impact that will have on the European economy and the political landscape.

“The point of Brexit is that it proves that populism is here and it is real,” he said. “It highlights that there are growing risks to the very fabric of the euro zone. The next 15 months is going to be extremely volatile geopolitically and gold could be seen as a political hedge.”

Although Lambert is bullish on gold, he doesn’t have a price target for the yellow metal. He also said that he prefers exposure to gold through the mining sector. He explained that the GAM Global Diversified Fund has a 5.5% position in the gold sector, which is currently being evaluated following the correction since start of the month.