Why the Market is Right on Gold

Posted on

Gold hits 1800
Equities turn lower
Nikkei -0.78%% Dax -0.62%
UST 10Y 0.65
Oil $40/bbl
Gold $1799/oz
BTCUSD $9294

Asia and the EU
No Data

North America Open
No Data

Gold surged through the 1800 level for the first time since 2011 bringing some excitement into what otherwise has been a very quiet Asian and European session with currencies at a standstill and equities tilting lower.

The move in gold has been a long time coming as the yellow metal remained bid from the start of the year rising from 1500 level as G-3 central banks ballooned their balance sheets. The move has been slow and steady suggesting that this may be a structural rather than tactical shift with some investors expecting an inflationary knock-on effect from the current global monetary expansion.

There is good reason to think that the market may be correct in its assessment as the current monetary expansion is effectively being used to finance fiscal spending rather than the QE programs of the decade past which essentially went into propping bank reserves.

If inflation does begin to accelerate the G-3 central banks are unlikely to instantly reverse course as their primary focus at this point is the revival of demand in a post-COVID world. That, in turn, will compress real interest rates lower making gold even more attractive as an investment in that type of a market regime.

The rise in the gold price could also bring turbulence to the stock market. Although stocks often rally in an inflationary environment that most happens when price levels are rising fast and investors simply reprice assets in nominal terms. Low-grade inflation, however, can be toxic for stocks especially in an economy with little pricing power as it erodes corporate profit margins.

It’s too early to tell if the market is correct in its assessment of inflation risk in G-3 economies but the move in gold is clearly giving equity bulls some pause today as all indices turn lower ahead of the North American open.

Boris Schlossberg
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *