Precious Metals

A weaker USD resulting from more dovish forward guidance from the Fed, and evidence of continued production declines in non-OPEC and OPEC countries will continue to buoy oil prices.

We upgraded gold shares to overweight in early March, because gold rises in stature as monetary policy loses its efficacy. The spreading global shift to negative deposit rates is creating a significant amount of uncertainty, as the unintended consequences of this unorthodox policy remain unknown. In the meantime, real interest rates, the opportunity cost of holding a zero-yielding asset like gold, have slipped back into negative territory, and may need to fall further to reverse the decline in economic confidence. That is a plus for gold, and gold shares. While gold and gold shares may look overbought on a short-term basis, it is important to keep the longer-term context in mind. Gold is still far below its 2012 highs, while gold share relative performance is barely above its secular lows, which should trump any near-term concerns about overbought conditions. Consequently, we continue to believe that gold equities provide attractive portfolio protection and are an excellent hedge against monetary policy exhaustion. Stay overweight. The ticker symbols for the stocks in this index are: BLBG: S15GOLD - NEM, RGLD. A Golden Opportunity A Golden Opportunity

These general themes - along with our assessment that markets were overestimating downside price risk and underestimating upside risks arising from supply destruction and geopolitical instability - supported the best-performing strategic recommendations we made last quarter.

Gold seems to be leading global share prices. Gold prices have rolled over since March 10. Hence, odds are that the U.S. dollar is about to bottom, and that global and EM stocks, as well as commodities prices, are about to relapse. We recommend two new trades in central Europe: Go long central European banks / short euro area banks and buy 10-year Polish domestic bonds.

Risk assets are stuck in a range driven by the Fed feedback loop. But the current rally may continue for another quarter or two.

While the post-GFC linkage between oil prices and medium-term inflation expectations evident in the 5-year/5-year (5y5y) CPI swaps market will continue to be debated for years to come, this is an empirical fact that will affect monetary policy and the evolution of FX and real interest rates over the medium term.

Lower oil prices are aggravating financial and social stress in poorer OPEC states, particularly in Venezuela, where the government recently executed a gold-for-cash swap ahead of looming debt payments.

The Fed's decision to scale back intended interest rate hikes reflects economic reality.

The allure of gold equities has risen another notch following this week's dovish shift at the FOMC. After raising interest rates only a few months ago in the face of tight financial conditions, the Fed has backed down, acknowledging global headwinds. However, this flip flop also underscores the Fed's data dependency, which is fostering increased overall policy uncertainty. When combined with the unknown consequences and efficacy of negative deposit rates abroad, the allure of owning gold as a portfolio and currency hedge climbs. At a minimum, the inability of global growth to gain traction underscores that real interest rates, the opportunity cost of holding gold, are likely to stay extremely low, or negative, for a prolonged period. As a result, gold should stay well bid, despite the gains that have already accrued year-to-date. We reiterate our recent upgrade to overweight. bca.uses_in_2016_03_18_001_c1 bca.uses_in_2016_03_18_001_c1

We differ markedly with the U.S. EIA's assessment of the near-term evolution of oil supply and demand.