Why gold prices may be headed for a painful pullback

The Street

Gold may be near its peak, but one expert says a sharp pullback could be coming.

Transcript

00:00Carly, gold prices have come back down to earth after hitting records, although still very close to those all-time highs.

00:06What's your outlook for gold prices this summer and as you think about the back half of the year?

00:10Gold is a market that you want to be bullish when nobody else is bullish.

00:14When everybody is bullish, which is the sense that I'm getting, I tend to be contrarian.

00:19So now I've started looking for gold to top out a little early, I will admit that.

00:23But I think in the big picture, when you look at the math that goes along with risk assets,

00:30gold doesn't make any sense.

00:31And here's why.

00:33The spread between gold and treasuries, let's say the 10-year note or 30-year bond, is the widest it's ever been.

00:40And generally what keeps that spread intact is the fact that treasuries pay interest and gold doesn't.

00:45So if you're somebody that has an extra money you want to put to work in a risk-off asset,

00:51so something other than stocks or real estate or maybe even commodities,

00:56you really have two primary choices, gold or treasuries.

01:00You can buy treasuries and earn 4% to 5% yield without a whole lot of downside risk

01:05because we're sitting at multi-decade lows in treasuries.

01:08But if you buy gold, we're near an all-time high.

01:10There's no risk parachute.

01:12There's no income cushioning your downside risk.

01:15So if you're trying to buy gold here because you think it's a risk-off asset,

01:20it might be a surprise to you.

01:21Gold is a risk-off asset until it isn't.

01:24The last time we had a rally this substantial in gold was 2011,

01:28and it concluded with a 45% haircut that took a decade to recover.

01:32So gold is a tricky market.

01:35It's a diversifier, and it works well in some environments.

01:38But when it doesn't work, it's very painful to be a holder of gold.

01:43Carly, where do you expect gold to top out,

01:46and at what point would you be comfortable getting in if we do see a pullback?

01:51Well, so, I mean, if I was somebody that wanted to buy gold,

01:54and I will be there again.

01:56You know, I was bullish gold for a very long time until I wasn't.

02:01But I probably won't turn bullish until we get well into the low 2000s.

02:05I know that sounds impossible.

02:07It sounds like that's a long way away.

02:08But we were just there a year-ish ago.

02:11And if you look around your quote boards,

02:13you know, we've seen assets give back an entire year's worth of gains over and over again.

02:18So it's not as far as it sounds.

02:20We could easily see 2150 to 2000,

02:23and that would basically retrace this entire breakout.

02:26And to be 100% honest, I think that's probably in the cards.

02:29I don't know exactly when and where,

02:31but I think that is what we'll see in the next couple of years.

02:34The gold market's obviously very, very messy.

02:37There's a lot of political issues pushing it around.

02:39So I don't know exactly where the top is.

02:42I suspect that 3,500 we saw a month or so ago probably was the top.

02:48If not, we might retest it or go a little higher.

02:50But we're in a sell-the-rallies mode in gold,

02:53and so we'll have to see how things play out.

02:55But again, I think there's just too much competition from Treasuries

02:58for gold to be a good buy up here.

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