Morgan Stanley Bullish On Gold Amid Rising Real Rates
EDITOR'S NOTE: As the financial landscape trembles under the weight of rising real interest rates, gold emerges as the unwavering beacon for savvy investors. Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management, emphasizes the precious metal's resilience in the face of surging real rates, indicating a prime buying opportunity. In a market where resilience meets opportunity, gold's allure shines brighter than ever, offering a haven amidst uncertainty and a hedge against inflation's looming shadow.
Gold’s resilience in the face of the runup in real interest rates means the yellow metal is presenting investors with a buying opportunity, according to Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management.
“Like equities, which have continued to shrug off the negative implications of rising real rates, gold, which moves inversely to real rates and in turn to the U.S. dollar DXY, has remained extremely resilient,” Shalett wrote in a recent note to clients. “Regarding the intermediate outlook, we are buyers of gold on weakness or declines in rates.”
Shalett noted that inflation-adjusted ‘real rates’ have seen a spike recently, with the 10-year Treasury’s real rate rising above 2.0% last week.
Source: Board of Governors of the Federal Reserve System (US) via Kitco
“The surge in real rates has been a multifactor move likely to force investors to contemplate valuation risks of a 'higher-for-longer' rate regime,” she said, noting that the 10-year note’s real rate has jumped almost half a percentage point in the past six weeks and is now at “its highest since the Great Financial Crisis” of 2007-2008.
10-year Treasury note is “the fundamental ‘risk-free’ benchmark underpinning most valuation calculations across capital markets,” Shalett said, and the rate spike appears “at least partially durable” because it’s being driven by a number of factors, including higher-than-anticipated Treasury issuance, credit-ratings downgrades, stronger-than-expected economic growth, and policy uncertainty.
Since breaking through the $1900 resistance level late on Aug. 22, gold has made steady gains. Spot gold is up 1.35% on the week, and last traded at $1941.05 at the time of writing.
Shalett said that gold’s resilience may have been supported by the view that the sharp rise in real rates is “purely technical” and will prove transitory. Another theory she proposed is that the yellow metal is “holding up as an alternative currency at a time when the dollar is vulnerable to debasement from inflation and ballooning deficit-financed spending.”
“Upside surprises on growth, inflation progress and earnings resilience have rewarded bulls in 2023,” Shalett said. But the CIO also warned investors that notwithstanding the stock market’s strong performance to date in 2023, “real rates of 1.5% to 2.0% have historically been correlated with price/earnings ratios close to 17, as opposed to the current 20 times forward earnings estimates.”
In July, Morgan Stanley raised its U.S. economic growth forecast for 2023 based on the strength of the industrial sector and more public investment in infrastructure, and said it expects a “comfortable” soft landing for the economy.
Economists at Morgan Stanley now expect U.S. real gross domestic product (GDP) to grow 1.3% on average this year, up from their earlier projection of a 0.6% rise.
“Incoming data now point to a more comfortable soft landing than we had anticipated, led by public investment in infrastructure and nonresidential structures investment,” Morgan Stanley economist Ellen Zentner wrote on July 20.
Originally published by Ernest Hoffman at Kitco
