“All That Glitters”: The Rally in Gold Seems Unstoppable at This Point
The comments below are an edited and abridged synopsis of an article by Benjamin Picton, Senior Macro Strategist
The gold price has reached new all-time highs, surpassing $2,600/oz, as the rally in the precious metal continues unabated. This surge comes in the wake of a surprising supersized rate cut by the Federal Reserve, despite strong economic growth, above-target inflation, and a staggering federal deficit. The timing of the rate cut has sparked debate, with many viewing it as politically motivated given its proximity to the upcoming election.
The contrasting behaviour between gold and the bond market offers an interesting perspective. While gold hit record highs, the Treasury yield curve bear-steepened, typically an environment where gold, as a zero-yield asset, would struggle. However, gold’s rise defied expectations, with equity markets responding to higher long-term yields by ending the session flat (Dow Jones) or slightly down (NASDAQ). The question arises: why did gold thrive while equities stalled?
Some attribute this to the fact that the Fed’s dovish stance was already priced into the bond market. Yet, this doesn’t fully explain the situation. The Dollar Index (DXY) dipped 0.39% last week, marking its third consecutive weekly decline, while gold surged 1.71%. This suggests that the devaluation of global currencies may be influencing gold’s rise, as markets increasingly factor in the unlimited supply of Treasury bonds.
Another potential driver could be comments by European Central Bank President Christine Lagarde, who recently drew parallels between the 2020s and the 1920s. She pointed out that adherence to the gold standard in the 1920s induced deflation, which contributed to economic nationalism. Lagarde seemed to imply that inflation, while painful, is preferable to deflation, perhaps encouraging investors to flock to gold as a hedge against future inflationary pressures. Bitcoin’s recent 1% rise could reflect a similar sentiment.
Oil prices also provide clues. After a sharp drop due to concerns about slowing demand in China and the U.S., crude rallied 4% last week following OPEC+’s announcement to extend production cuts. This, coupled with the Fed’s rate cut, has led some to speculate that other commodity markets may be pricing in a long-term inflationary trend. The Bloomberg Commodity Index, which has risen in 9 of the last 10 sessions, supports this theory.
Looking ahead, this week will be less eventful in terms of market data. However, the release of the August PCE price index in the U.S. could offer insights into inflation trends. A core year-over-year rate of 2.7% is expected, but a higher-than-anticipated figure could put the Fed in an awkward position, having just cut rates by 50 basis points.
Meanwhile, the Reserve Bank of Australia (RBA) is set to announce its September policy decision. Despite tough talk on inflation, the market remains skeptical that the RBA will raise rates, with a rate cut in December now 66% priced in. Political interference in monetary policy has resurfaced in Australia, as Treasurer Jim Chalmers seeks to reform the RBA, facing opposition from the Greens, who demand immediate rate cuts. Ultimately, the rise in gold reflects broader political and economic uncertainties, underscoring the complex relationship between monetary policy and market behavior.