I’m still struggling to be the raging gold bull that I was back at the end of 2018 as deflation danger is all over the place. Back then, I was lifting offers when I walked in. Today I’m on the bid, but 25 dollars below the current rate.
On your recent grocery store soiree, you probably noticed that staples are a touch higher than before Covid-19 and that facemasks are fetching a multiple of what they cost a few short months ago. While central banks around the world are pumping in liquidity – if not printing money outright – as political leaders keep topping up fiscal stimulus programs, I should be buying gold every morning I walk in.
Sure it’s early days in the deflationary narrative as the first CPI readings have merely fluttered, but in my newly adopted home in Thailand headline prices tumbled 3% y-o-y in April, and Taiwan by 1%, with Malaysia, Singapore, Korea and Japan all close to the waterline and expected to drop lower unavoidably. As ex oil, the deflationary effect from the demand collapse has fully kicked in, which takes longer to feed through to core than non-core CPIs.
Over the short term the deflation overhang could weigh on gold prices, but with interest rates at zero gold comes out smelling like roses over any fiat currency, any day of the week, and will remain well bid on dips. I’m just not sure if it’s going to fire higher until deflation reverses. While I continue bullish, I’m waiting to buy more gold at cheaper levels.
What does this mean for golds long term prospects? Not much, as the narrative remains onwards and upwards for no other reason than US dollar debasement being in full swing.
Fortunately for gold investors, we’re not in ancient times when debasement was implemented by mixing a lower value metal to the gold content of coins, so gold will most certainly remain in demand.
As for equity markets correlation, Chis Louney at RBC made a good point in an overnight note:
"In our view, historical correlations are rules that can be broken, and we think that these days gold can continue to win even if equities improve, as investors are acutely aware of the risk that they are taking on and will seek out hedges like gold."
I’m not sure if it’s worth adding to that, other than to concur. But equity market risk on appetite has been primarily driven by central bank largesse, which is equally supportive for gold.
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Stocks soar, powered by first-rate earnings and a dazzling run of economic data; Gold plays catch as G10 falls flat while oil basks in the afterglow