Always sunny with Gold?
The recent weather in the UK has been unseaonally good. In fact it has been very 'un-British' with days of unbroken sunshine and temperatures of 25C+. Recently the rain has returned, so the UK has probably just had its summer early. It usually lasts about two weeks, so that would tie in. However, is gold the 'sunshine' place to be over the coming months?
Rising yields problematic for gold
Gold has no interest rates. This means that there is no reward for holding gold unlike a stock that rewards a dividend or a bond that gives a yield. So, with bond yields rising this proves a disincentive to invest on gold. Midweek gold fell through the $1700 level as the ADP data showed a better than expected losses of 2.7million jobs. There had been 9 million job losses expected, so this bodes well for NFP later today. This report , alongside the ISM PMI, stoked hopes of a V-shaped recovery and bond yields broke higher. All of this was a drag for zero interest gold. However, is all lost for gold bulls?
Gold as a hedge against inflation
I came across a piece on Bloomberg's Markets Live Blog making a case for gold as a hedge against potentially coming inflation. The reasoning is as follows:
- Fed won't change it's monetary policy until job market returns to post COVID-19 levels
- Fed is considering yield curve control - see here for an explanation
- Longer term risk if if Fed responds to a rebounding US economy by ending QE and preparing for rate hikes. This seems harmful for gold, but could take place in an inflation positive environment.
- Fed's balance sheet is expected to climb to $12 trillion and exceed 50% of GDP by year end. Combine that with ECB and BOJ balance sheets the threat of price spikes become real.
The verdict?
How likely is run away inflation? We should have been seeing rising inflation since around 2009, but it hasn't come. Are markets too complacent on inflation? Will investors get caught out when inflation comes and we see commodities and real assets rise? I'm not sure. I can see the argument for higher inflation, but can't see the evidence for it. What do you think? Are we sleep walking into higher inflation or is low inflation set for years to come. According to the Financial Times US investors are pricing in an average of 1.75% over the next 10 years. That is not much at all and any deviation from these expectations will have folks scrabbling for commodities like gold.
