With Fed ‘Behind the Curve,’ SkyBridge Flags Risks for Goldby
Bullion’s advance may be a ‘bear-market rally,’ Gayeski says
Gold has gained 26% this year with U.S. rates on hold so far
SkyBridge Capital, which invested profitably in gold during its tremendous surge in 2010 and 2011, has a word of caution for those targeting further gains this year: watch out for the Federal Reserve.
While fundamentals are supportive, bullion’s rally could be stymied if the Fed decides to increase rates at a faster pace than expected, according to Troy Gayeski, a senior portfolio manager at the investment firm founded by Anthony Scaramucci. SkyBridge, which managed $12.6 billion as of May 31, currently doesn’t have any exposure to gold and precious metals.
“We understand why people are bullish, it’s been successful so far this year,” New York-based Gayeski said in a phone interview. “The cautionary note is to remember that if the Fed does tighten more aggressively than what markets are pricing in, maybe this will be another bear-market rally.”
Gold is one of the best performing commodities in 2016 as investors flocked to the metal amid financial-market turmoil, negative interest rates in Japan and Europe, and the Fed’s inaction since December after raising borrowing costs for the first time in almost a decade. This week, Fed policy makers took a step toward raising rates as they upgraded their assessment of the economy, while stopping short of signaling that the move could come as soon as September.
‘Behind the Curve’
“The Fed is arguably behind the curve already given the employment picture and the fact there’s nascent signs of inflation picking up,” Gayeski said. “They are apparently erring on the side of caution and would rather see markets bubble up maybe more than one would’ve thought a year ago to really crush any risk of deflationary pressures returning.”
After posting three annual losses, bullion has surged 26 percent in 2016, trading at about $1,335 an ounce on Friday, according to Bloomberg generic pricing. SkyBridge bet on gold during what Gayeski called “the great bull market” in 2010 and 2011, when it rallied to an all-time high of more than $1,900. “We were fortunate to get out around $1,720,” he said.
Other investors have been more positive on gold this year, with inflows of 540 metric tons into bullion-backed exchange-traded funds boosting assets to near a three-year high. Hedge fund manager Paul Singer said in a letter to clients in April it made a great deal of sense to own the metal. In May, billionaire Stan Druckenmiller said the bull market in stocks was exhausted, and gold was his largest currency allocation.
The Fed’s statement on Wednesday said that near-term risks to the outlook have diminished and job gains were strong, though inflation remains too low. Policy makers’ preferred inflation benchmark, minus food and energy, rose 1.62 percent for the year to May. The target is 2 percent for the full index, which is rising at less than half the desired pace because of weak oil prices.
While one-to-two rate increases over the next 12 months makes sense, just a single hike wouldn’t be a surprise, according to Gayeski, who’s overseen discretionary portfolios since 2006, with prior experience at Citigroup Alternative Investments. Fed funds futures put the odds a hike by December at about 45 percent.
While bullion could climb to about $1,450 by the end of the year, with upside from no hikes at all in 2016, the downside would be a more aggressive Fed, according to Gayeski. A much bigger jump for prices could happen only if the U.S. economy deteriorates to the point that the Fed decides to cut, and opts for a return to quantitative easing, a scenario that was highly unlikely, he said.
“When you think of where we are today, it’s hard to call with certainty that a new bull market has resumed” in gold, said Gayeski, describing the commodity as more of a wild card than most asset classes as it’s harder to predict. While gold is a potential option for investments in the future, at present “our exposure to gold and precious metals is a whopping zero,” he said.