$5,000 gold is back in play, and $10,000 is a matter of 'when, not if' - State Street's Doshi

Gold ’s recent correction appears to have done little to damage its long-term investment case, and with concerns over unsustainable sovereign debt returning to the forefront of global financial markets, one strategist sees $5,000 an ounce by year-end firmly back in play. However, Aakash Doshi, Head of Gold Strategy at State Street Investment Management, said in an interview with Kitco News that investors should be thinking beyond gold’s next milestone. In the current global fiscal environment, he sees $10,000 gold as ultimately a question of timing rather than possibility. Doshi’s bullish outlook comes as gold prices have rallied roughly 15% in August, their best monthly performance since January 1999. Spot gold last traded at $4,621.30 an ounce, down 0.79% on the day. He explained that the “debasement trade” that drove gold to record highs earlier this year never disappeared. Instead, it went dormant as rising interest rates and a stronger U.S. dollar created significant headwinds for the precious metal. “At State Street, we never thought it was dead; we just thought it was on pause,” he said. “And now I think it’s alive again.” Doshi said the renewed momentum comes as several important macroeconomic developments have shifted in gold’s favor. The Federal Reserve has yet to deliver on the market’s hawkish expectations, U.S. labor market data has softened and the Treasury Department’s decision to increase long-term bond buybacks has once again focused attention on America’s deteriorating fiscal position. He added that gold ’s ability to hold $4,000 through its correction and subsequently rally back toward $4,600 to $4,700 has strengthened his conviction that the broader bull market remains intact. Doshi said State Street’s base-case range is now $4,750 to $6,500 an ounce by early next winter. Within that outlook, he sees the low-$5,000 area — roughly $5,000 to $5,250 — as a reasonable target, with the potential for the move to happen sooner than previously expected. A dovish shift from the Federal Reserve or another macroeconomic shock could potentially bring $5,000 into play as soon as the fourth quarter, he said. “We started to see inflows rebound aggressively from Western ETF investors,” Doshi said. “I think there’s plenty of firepower here to go.” Although monetary policy remains an important tactical driver for gold, Doshi said the much bigger issue facing global markets is the sustainability of sovereign debt. U.S. government debt recently surpassed $40 trillion, but Doshi said investors should not view the problem solely through an American lens. Fiscal deterioration and rising long-term borrowing costs have become global issues, affecting the United Kingdom, Europe and Japan as governments continue running substantial deficits even outside recessionary periods. He added that this environment will continue to create broad support for gold as a global monetary asset. “There is just a concern about the sheer level of debt, the amount of fiscal spending that’s happening during non-recessionary periods,” he said. This changing fiscal landscape is also forcing investors to rethink one of gold’s most important traditional relationships. Historically, higher bond yields — particularly higher real yields — have been negative for gold because they increase the opportunity cost of holding a non-yielding asset. However, Doshi said investors now have to ask why yields are rising. He noted that if yields are moving higher because economic growth is accelerating and investors are increasingly optimistic about corporate earnings, that environment could create legitimate competition for gold. But if yields are rising because investors demand a larger term premium to compensate for inflation, excessive government borrowing and deteriorating fiscal credibility, the implications are considerably different. In that envi...