Gold has shown resilience despite the recent surge in real interest rates, presenting investors with a buying opportunity over the intermediate term. According to Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management, gold, like equities, has shrugged off the negative implications of rising real rates and remained extremely resilient.
In a note on Monday, Shalett wrote, “Regarding the intermediate outlook, we are buyers of gold on weakness or declines in rates.”
The recent jump in real rates, which account for inflation, has eroded equity valuations this month. However, the U.S. stock market remains solidly higher for the year.
Shalett noted that the surge in real rates has forced investors to consider the valuation risks associated with a “higher-for-longer” rate regime. The 10-year real rate rose above 2.0% last week, reaching its highest level since the Great Financial Crisis.
The rise in real rates is driven by various factors, including higher-than-anticipated Treasury issuance, credit-rating downgrades, stronger economic growth, and policy uncertainty. These factors contribute to the durability of the increase.
In conclusion, Morgan Stanley’s wealth-management business views the recent weakness and declines in rates as an opportunity to buy gold. Despite the challenges posed by rising real rates, gold has proven its resilience and remains an attractive investment option in the current market.
U.S. AAA Debt Rating Downgraded by Fitch; Gold Shines Amidst Uncertainty
According to FactSet data, the SPDR Gold Shares ETF (GLD) has experienced a modest year-to-date increase of over 5%, despite a recent dip of about 2%. Similarly, gold futures (GC00) have retreated 3.2% in August, but remain on an upward trajectory of 6.5% for the year based on the most actively traded contract.
The enduring strength of this precious metal can be attributed to several factors. Some experts believe that the recent rise in interest rates is merely a temporary and technical phenomenon, which has bolstered gold’s appeal. Another theory posits that gold is serving as a safe haven amidst concerns of inflation and mounting deficit-financed spending, both of which threaten to debase the value of the dollar.
Despite encountering volatility prompted by rising rates in August, the U.S. stock market continues to surge ahead. The Dow Jones Industrial Average (DJIA) has achieved a solid 4% gain thus far in 2023. Similarly, the S&P 500 (SPX) has risen approximately 15.5%, while the technology-heavy Nasdaq Composite (COMP) has experienced a remarkable surge of nearly 31%, according to FactSet data.
Jennifer Shalett, a market analyst, attributes this positive performance to unexpected growth, progress in managing inflation, and robust earnings. However, she cautions that historically, price/earnings ratios tend to align closely with real rates of 1.5% to 2.0%, rather than the current 20 times forward earnings estimates.
In summary, while Fitch’s downgrade of the U.S. AAA debt rating has raised concerns, the resilient performance of gold and the stock market suggest that investors remain optimistic amid a complex economic landscape.