Sprott says gold might break US$1,400, driven by correction in equity markets

(July 18, 2017 - by Bloomberg)

Sprott Inc, the precious metals-focused money manager, sees gold rising by the end of this year as weaker-than-expected economic growth drives stock prices lower.

“The next move on gold will be driven by an equity market correction,” Sprott chief executive officer Peter Grosskopf said in an interview in New York. “It’s a pretty safe bet that if equity markets start to look volatile and dangerous then a lot of money will flow into gold as a hedge to that.”

A recent spate of hawkishness from global central banks has pressured gold prices, which have fallen about 5 percent since early last month.

The Bank of Canada on Wednesday raised rates for the first time since 2010 and other central banks from the US Federal Reserve to the European Central Bank have indicated their willingness to tighten monetary policy.

Gold tends to weaken in periods of rising interest rates, which bolster the US dollar.

Yet Grosskopf said developed economies are not as strong as some economists are forecasting and rate hikes might not come as quickly as the market believes.

“We think the underlying economies and the strength of the economies can be debated,” he said. “If you look at the underlying statistics, it’s a lot less evident that the economy is strong.”

Coordinated global rate hikes amid low inflation could pressure stock markets and currencies, Sprott USA chairman Whitney George said.

“When you look at the history of the last 20 years, every time central banks have decided it was time to take the punch bowl away we’ve had quite a dislocation,” George said.

Strategists from Toronto-based Sprott see the potential for gold futures to break past US$1,400 per ounce by the end of the year under the right conditions, compared with US$1,228 on Friday.

Gold for August delivery this week rose 1.32 percent from last week’s US$1,212 per ounce.

“People haven’t placed a high priority on having a hedge because the punch bowl seemed to be relatively full,” Grosskopf said. “Gold is vastly underinvested by most investors, so it’s got a lot of growth ahead of it.”