Gold is being largely misunderstood and we should recognize how mispriced it is, according to Diego Parrilla, managing director at investment firm Old Mutual Global Investors.
"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".
Although Parrilla thinks gold prices should stay contained in the short-term, down the track he envisages a "perfect storm" investment thesis that could ultimately end with asymmetric upside for the precious metal.
Perfect storm
The thesis sees the first pillar of concern being the great jump in duration risk 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 second pillar refers to the spike in equity and credit risk given investors have been forced to move out along the "risk curve" in pursuit of extra return in what Parrilla refers to as "the desperate search for yield".
The next stage of the theory sees bubbles developing and spiraling out of control, forcing central banks to step in at precisely the moment where they can no longer contain the situation. This, according to Parrilla, could ultimately end with an explosion in foreign exchange risk,destabilizing fiat currencies and creating significant upside for gold.
Parrilla draws a parallel between OPEC and central banks,cautioning on the moment when real control dissolves into only an appearance of control.
"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.
Buy now?
However, despite the dramatic outlook, Parrilla says this scenario could be sidestepped should the U.S. and other major central banks manage to execute a smooth normalization of monetary policy.
As the extended period of abnormal monetary policy continues and equity and bond valuations approach record levels, calls have mounted in recent months for lawmakers to do more to support central banks with fiscal levers. Monetary policymakers are viewed as having done much of the heavy lifting to keep the global economy afloat in recent years and ECB (European Central Bank) President Mario Draghi has been among the key voices highlighting the unsustainability of central banks maintaining such a burden.
Gold was trading down again in Thursday's session with the precious metal tracking lows not seen since late June. This as investors await U.S. non-farm payrolls data on Friday for the latest gauge on U.S. economic activity and its effect on the market's perceived likelihood of a Federal Reserve rate hike in December.
According to Parrilla, while there may be a further slide ahead, it could make sense for some investors to buy now, depending on their investing time horizon.
"I think it may well be this is the point to step in but with the perspective that this is a long-term trade," he said.
"Who knows what's going to happen in the short-run. You have to have a long-term perspective in gold."