March 21, 2022 – Sprott Market Strategist Paul Wong joins Asset TV's Jenna Dagenhart to discuss Sprott's outlook for gold.
Jenna Dagenhart: We're on a path to higher rates. All the while, geopolitical tensions are rising in response to the Russia-Ukraine conflict. Joining us now to share his macro views and explain why gold could do well in this environment is Sprott Market Strategist Paul Wong. First, Paul, how is the Russia-Ukraine conflict impacting markets, and has this changed the course of monetary policy?
Paul Wong: The Russian-Ukraine conflict is probably one of the biggest macro drivers in the marketplace. Over the last few years, we had a number of them. The last one of this magnitude was probably the COVID crisis in March of 2020. And today, the Russian-Ukraine crisis is still in its early days. The risk factors are spreading out. There is a huge impact, probably on inflationary and growth outlooks. And it's starting to, again, morph and evolve. Commodity markets are under stress. The funding markets are under pressure. We can see that through the strength of the U.S. dollar. We can see several things going on that point toward a more challenging market going forward.
Jenna Dagenhart: Do you think the Fed is behind the curve, potentially tightening into a slowing economic backdrop?
Paul Wong: The market's certainly pricing that in. Since the Fed announced that it was on a path to higher rates, the yield curve has been flattening steadily. Today [March 21, 2022], the 2-10 YR Treasury yield curve sits around 25 weeks. We're very close to flattening to inversion. Parts of the curve are already inverted, and we are definitely seeing signs of stagflation being priced into the market. Break-evens are heading higher, to new highs. That indicates that inflation expectations are rising.
Real yields are back to roughly about minus 1% right now, again, indicating a slowdown. Higher inflation, slow down, that's the stagflation picture, and it is building. The pressure we see in the commodities market has been extremely volatile in the last few days. Most indication shows that it'll probably head higher on supply shortages, which is mostly due to Russia's sanctions.
Russia is the world's largest commodity producer of almost everything. It is roughly the size of Saudi Arabia in terms of oil production, so its export market is significant. The amount of barrels that are affected right now, best guess is somewhere in the 3 to 5 million barrels are already impacted. We're seeing a lot of self-sanctioning that's going right now, even though the U.S. has just announced that they will sanction import oil.
Many commodity users, providers of transportation, and financial facilities are all heading toward self-sanction. There is almost a semi-defacto oil embargo going on right now. The pressures will build, especially as the U.S. head towards driving season and demand-pull becomes much higher for gasoline, crude oil and refined product demand.
Jenna Dagenhart: Now, what are your expectations for real yields, interest rates and inflation going forward?
Paul Wong: Real yields, the best guess is that they are range bound. Current levels at minus 1%. It basically fights the Fed's ability to lower inflation, so low negative real yields loosen financial conditions. That's a bit of a headwind to the Fed trying to push down inflationary pressures. And if real rates rise too quickly, too high, that affects the outlook for growth and growth expectations. So it's a bit of a narrow window where the Fed needs to thread the needle.
Nominal yields look like they are probably heading higher. We can see there's tremendous pressure on the inflationary front currently. And with a seemingly, day by day, increasing stagflationary pressure as well. Europe is certainly feeling stagflation because of its dependency on Russian energy exports.
As for inflation right now, the last inflation data shows inflation is still broadening and increasing. There are no signs of it abating anytime soon. And with the across-the-board price increases across almost all commodities, energy, food, it's hard to see inflation abating within the next few months until you reach the point where you have demand destruction, which translates to recession.
Jenna Dagenhart: And stagflation as well, potentially. Finally, Paul, how do you see a more hawkish Fed impacting the precious metals markets?
Paul Wong: Less so, because there are greater pressures elsewhere. Before Russia-Ukraine, the gold market had started shaking off the hawkish Fed rhetoric. Early 2021, we probably saw the maximum pressure on gold from Fed rate high expectations. And somewhere around September through November, gold started decoupling away from the Fed hawkish talk. The correlations were starting to break down, and gold was starting to price other things. And mostly, I believe, it's probably the safe haven aspect. The market, again, was pricing, the Fed was hiking into a slowdown and there would be greater stress in the marketplaces going forward. The Russia-Ukraine situation just amplified that move.
Jenna Dagenhart: Certainly. Well, a lot is going on in the world right now, Paul. Thank you so much for joining us.
Paul Wong: Thank you for having me.
Jenna Dagenhart: Thank you for watching. Once again, I was joined by Sprott Market Strategist Paul Wong. I'm Jenna Dagenhart, with Asset TV.
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