Houston, We Have A Stagflation Problem. Now It’s Time for Gold!
The comments below are an edited and abridged synopsis of an article by Arkadiusz Sieroń
Experts from the World Bank finally admitted that the risk of stagflation is getting bigger and more real. For gold, that’s pretty good news.
Several months ago, pundits were dismissing the possibility of stagflation. But in its latest report, the World Bank admitted that “stagflation risks are rising amid a sharp slowdown in growth.” It reduced its global growth forecast from 5.7% in 2021 to 2.9% in 2022, significantly lower than the 4.1% predicted in January. What’s really disturbing is that between 2021 and 2024, global growth is thought to have slowed by 2.7 percentage points—more than twice the deceleration between 1976 and 1979.
What does this mean for the economy and the gold market? Well, policymakers usually don’t admit they were wrong. If they do, it’s because they know how bad the situation is about to get. The fact that the World Bank openly predicts stagflation is another indication that the economic situation is turning sour.
To combat high inflation in the 1970s, the Fed was forced to hike interest rates so steeply that it triggered a global recession. Nominal 10-year Treasury yields have just surpassed 3%, a relatively high level in recent times, but nothing compared to the levels seen in the 1970s and 1980s. Particularly disturbing is that debt levels are much higher today than during the Great Stagflation, so the Fed’s tightening cycle could be even more harmful now.
Stagflation should be positive for gold. The sample is small because there has only been one stagflation in the past, which overlapped with the end of the gold standard and the liberalization of the gold market, but a recession should make gold rally. The danger for gold is rising real interest rates, but the current path of monetary tightening is probably already priced in by the markets, so only a more aggressive stance than the markets expect right now could harm the yellow metal.
Gold continues to trade around $1,850, and it seems to be waiting to decide which path to take. The Fed’s monetary policy meeting may provide a needed catalyst.
