Daily Management Review

Strategist says Amid Falling Bond Yields, Gold is the Ultimate ‘Anti-Bubble’


10/06/2016




Strategist says Amid Falling Bond Yields, Gold is the Ultimate ‘Anti-Bubble’
Diego Parrilla, managing director atinvestment firm Old Mutual Global Investors believes that we should recognize how mispriced gold is and it is being largely misunderstood.
 
"We are creating the biggest bubble in duration (with the debt markets) that we've probably seen in financial history", he warned as he described gold as an "anti-bubble".
 
Down the track Parrilla envisages a "perfect storm" investment thesis that could ultimately end with asymmetric upside for the precious metal, although he thinks gold prices should stay contained in the short-term.
 
As continuing low interest rate policies from central banks raise the risk of severe pain for bondholders when rates do eventually rise, driving yields up and bond prices down, the thesis sees the first pillar of concern being the great jump in duration risk.
 
In pursuit of extra return in what Parrilla refers to as "the desperate search for yield", investors have been forced to move out along the "risk curve”, according to Parrilla and this the second pillar hat he refers to related to the spike in equity and credit risk.
 
In the next stage, central banks would be forced to step in at precisely the moment where they can no longer contain the situation and this is the next stage of the theory that sees bubbles developing and spiraling out of control. This, according to Parrilla, could ultimately end with destabilizing fiat currencies and creating significant upside for gold and an explosion in foreign exchange risk.
 
Cautioning on the moment when real control dissolves into only an appearance of control, Parrilla draws a parallel between OPEC and central banks.
 
"A scenario a bit like happened in oil with OPEC, where fora while it looks like they're in control, there's a perception that this thing can continue forever until they stop being in not in control," he said.
 
However should the U.S. and other major central banks manage to execute a smooth normalization of monetary policy, this scenario could be sidestepped despite the dramatic outlook, Parrilla says.
 
Calls have mounted in recent months for lawmakers to do more to support central banks with fiscal levers as the extended period of abnormal monetary policy continues and equity and bond valuations approach record levels. ECB (European Central Bank) President Mario Draghi has been among the key voices highlighting the unsustainability of central banks maintaining such a burden and monetary policymakers are viewed as having done much of the heavy lifting to keep the global economy afloat in recent years.
 
With the precious metal tracking lows not seen since late June, gold was trading down again in Thursday's session.
 
According to Parrilla, it could make sense for some investors to buy now, depending on their investing time horizon while there may be a further slide ahead.
 
"I think it may well be this is the point to step in but with the perspective that this is a long-term trade. Who knows what's going to happen in the short-run. You have to have a long-term perspective in gold," he said.
 
(Source:www.cnbc.com) 






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