Gold—The Mother of All Opportunities as Central Banks Walk The Line
The comments below are an edited and abridged synopsis of an article by Ross Norman
Inflation can signal a robust economy or it can signal trouble. The same might be said of bond yields.
Gold’s decline could be because it has held a long-term inverse binary relationship with declining bond yields, and the rally in the 10-year rate has prompted selling. Markets may have it wrong: Bonds are falling and yields are rising because inflation looms. The data has yet to catch up with the narrative and gold is being punished. In short, maybe they are on the wrong end of the deal.
It’s not all about bonds. The US dollar is at the highest for nearly a year. Last year there were no dollar bulls and the short-dollar trade was active. But the market has inflicted the most damage on the greatest number of participants and the short covering rally in the dollar has piled on the pain for gold bugs. Again, the wrong outcome.
At current levels, gold is an absolute steal. If you missed the start of a new gold bull run in 2018, this is your last call.
The path ahead depends on how central bankers navigate the fine line between two dangers: Austerity and a mired economy struggling to shake off the effects of the policy response to Covid, and inflation and over-heating. There is minimal margin for error. Even a 1% rise in rates risks tipping the market into recession and will increase the cost of servicing the debt. Meanwhile, the market is short of portfolio diversifiers, with bonds still generating negative yields.
Many commodities (including oil, iron, rubber, steel, minor metals, coal, lumber, wheat, grains) have risen over the past 12 months; most are up double digits. Cost-push inflation is only part of the story; as economies unlock, you should see demand-pull, plus the accelerator as the velocity of money increases. The real rate of inflation in H2 will likely be somewhere between 6% and 12%, enough to prompt significantly higher gold prices.
We last saw inflation rates north of 5% between 1976 and 1982, and gold saw a CAGR of just under 20% per annum. Perhaps 40 years of disinflationary forces are coming to an end, and the 60/40 portfolio mix will need reviewing.
Norman thinks gold will reach $2,025. At $1,700, it is a significant buy.
