Gold failed to hold above $1,800 in its last rally and fell. The increase in interest rates emerges as an important factor in the decline of non-yielding gold. However, TD Securities disagrees on the issue of no return. The bank remains hopeful about gold returns as monetary conditions tighten. That’s why he says the future of gold returns is solid.
Is it possible to earn income from gold?
TD Securities points out that gold deposits are starting to pay strong returns. In this context, he says, it is a misconception that gold does not yield returns, at least when it comes to central banks. Bart Melek, head of commodity strategy at TD Securities, comments:
Earning returns from gold holdings is not generally available to most private investors. However, it is possible for central banks to actively manage their assets to generate returns.
Bart Melek says it is possible for central banks to lend their bullion reserves to interest on gold deposits. Or, they have the possibility to exchange the precious metal for US dollars at the gold quoted forward rate (GOFO) or swap rate.
“Central banks will be less aggressive with increasing bullion reserves”
cryptocoin.com readers know that gold reserves are highly liquid assets. Over the last three decades, gold rental rates have fluctuated between three different periods. Between 1989 and 1999, the 12-month gold rental rate averaged 140-200 basis points. This is a very strong rate. Between 2000 and 2009, it averaged 54 basis points. The strategist points out that there are only 15 basis points between 2010 and 2020. After Covid, a major shift occurred as global monetary policies tightened. The rate has averaged around 50 basis points since mid-March 2022. TD Securities interprets the issue as follows:
Real interest rates will continue to rise across most of the Treasury curve as the Fed continues to tighten aggressively in the face of very high inflation. Speculative long activity will decrease. Central banks will be less aggressive with increasing gold reserves. As a result, the environment will ripen again for a sustainable period of relatively high returns paid on gold deposited in bullion banks.
Why are gold returns starting to look promising?
Central banks hold gold in their reserves mainly because of its intrinsic value, liquidity and the fact that no one is responsible. However, TD Securities notes that there is pressure on central banks to use their gold reserves to generate returns beyond capital gains. In this context, Bart Melek talks about the following:
This results in higher rental rates as central bank metal fills the spot markets, which is then returned in the future by producers and other physical owners. This is a trend that has started to return recently. According to the World Gold Council’s 2020 Central Bank Gold Reserves Survey, 47% of respondents said they actively lend their assets, while 53% said they engage in barter transactions for gold reserves.
“This is good news for gold returns”
Bart Melek says market conditions now consistently favor higher positive gold rental rates. The strategist explains his views as follows:
The Fed and other monetary authorities have engaged in aggressive tightening. For this reason, the extremely dove currency conditions were reversed. This indicates that the environment is ripe for higher rental rates. In addition to monetary policy, central bank sales and purchases also help drive gold rental rates to gold.
Also, Bart Melek notes that higher real and nominal rates are generally good news for gold returns. According to the strategist, selling pressure or a general lack of interest in gold will persist into 2023 as aggressive Fed rates increase real rates of increase along the curve and the opportunity cost of holding the yellow metal in vaults in the face of unacceptably high inflation. In addition, Melek concludes that rental rates should be at consistently high levels not seen in more than a decade.
“Gold yields could rise in 2023”
The bank also foresees lower gold prices going forward. This benefits gold yields as bear markets where gold increases hedging activities. That’s why Melek says a bear market in gold will encourage miners to hedge with bullion banks. He notes that this creates an environment in which gold rental rates will be high and volatile. The strategist makes the following assessment:
Weakness in the economic and commodity markets also means that many central banks will need to use their USD reserves more than when they are buoyant. This shows that gold purchases may be slow. It’s also possible that it will help boost gold yields in 2023.
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