(Kitco News) - The gold market is starting the new trading week at a one-month low with prices dropping below $4,300 an ounce and the precious metal faces further downside risks as the Federal Reserve rate hike this week, but according to one fund manager, investors focused on the next 25-basis-point move are missing the much bigger picture.
In an interview with Kitco News, Ryan McIntyre, President of Sprott Inc., said that in a world struggling with growing sovereign debt and deteriorating fiscal stability, gold remains the “North Star” of monetary assets.
Although gold has already enjoyed a strong run this year, McIntyre said the precious metal remains significantly underowned, particularly among U.S. institutional investors. He added that gold’s performance during a period of rising geopolitical and fiscal uncertainty could finally force investors to reconsider its role as a portfolio diversifier.
McIntyre said the catalyst for broader investment demand could ultimately be a reassessment of financial risk, potentially triggered by rising bond yields or weakness in equity markets. He noted that investors have so far been surprisingly reluctant to reevaluate portfolio valuations despite higher long-term yields.
At the heart of McIntyre’s bullish outlook is growing concern over U.S. fiscal sustainability. He said investors should watch the relationship between economic growth and the government’s rising interest expense.
“My view is once the interest expense exceeds the nominal growth rate in the United States, then you run into trouble because you literally can’t even pay off the interest. The economy’s not growing itself out of the interest,” he said.
With nominal economic growth running around 4%, McIntyre said normalized government interest costs are moving dangerously close to that threshold. At the same time, he said the bond market is already showing signs that policymakers are losing some control over longer-term interest rates.
McIntyre said the fiscal outlook will remain unstable until the government fundamentally realigns deficit spending. However, he added that meaningful fiscal tightening could also weaken economic growth, creating an increasingly difficult policy dilemma.
Against that backdrop, McIntyre said the traditional argument that higher interest rates increase gold’s opportunity costs becomes less important as fiscal risk rises.
“The nominal interest rate argument is gonna diminish as there is increasing fiscal uncertainty,” he said. “Because the U.S. is so large, there’s only really one natural outlet for people to counter that, and that’s gold. We know the release valve is gold. We know that. There is no other equivalent.”
McIntyre expects those pressures eventually to push investment demand to new highs.
“I think we will have record gold holdings in ETFs coming,” he said, adding that fiscal conditions are “unquestionably getting more risky.”
McIntyre added that the problem extends beyond the United States. Fiscal risks among some of the world’s largest economies and currencies reinforce gold’s position as an asset without a corresponding sovereign liability.
“It’s exactly why gold will become the relief valve because there really is no alternative,” he said.
Although the longer-term environment remains supportive for gold, investors still face an important near-term hurdle as markets prepare for the Federal Reserve’s monetary policy decision.
McIntyre said the market has largely priced in a rate hike, although he believes the decision could be closer than investors expect. He said policymakers have to balance persistent inflation pressures against the financial consequences of higher borrowing costs.
“I think it’ll be a much tighter call than the market’s pricing in,” he said.
However, McIntyre does not expect a rate hike to materially alter gold’s trajectory. With tighter monetary policy already largely discounted, he said any weakness could prove short-lived.
“If they raise rates, do I think gold’s gonna drop? Not really. If it does, it might just for a day,” he said. “If they don’t raise, then gold will likely go up.”
Rather than focusing on month-to-month interest-rate expectations, McIntyre said investors should keep their attention on the deteriorating fiscal trajectory.
“My eye is on the horizon,” he said. “The bigger picture on gold is just so much clearer. The longer-term view is so much clearer than the short term.”
“The fiscal path that we’re on is not good and will only be getting worse,” he added. “And that’s all you have to know to know that gold price is gonna do well.”
Ultimately, McIntyre said gold reflects the declining purchasing power of the currency in which it is priced. As fiscal pressures increase and currencies lose value, investors should focus on that longer-term relationship rather than short-term monetary-policy noise.
“I think people should just focus on the North Star,” he said.
McIntyre said even meaningful changes in short-term interest rates would do little to resolve the underlying fiscal problem.
“Anything that they do will be relatively meaningless in the bigger picture,” he said. “They’re either gonna accelerate things or slightly decelerate things, but the end game is identical.”
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