The gold is back, baby.
Not that it ever left, but returning flat in 2022 was a disappointing result in some quarters when viewed against the backdrop of rampant inflation, the very thing that is supposed to send gold north.
I wrote a new analysis last month on how the inflation narrative had fallen away and a dive into how quantitative easing had kept the metal in check. The chart below shows the remarkable divergence over the last year or so, where the price of gold failed to follow inflation upwards.
Interest rate expectations are changing drastically
But to quote Ron Anchorman, things have escalated quickly. The banking crisis, which was triggered by the collapse of SVB in the US before spreading to Europe, most notably rocked Credit Suisse (SGX: CSGN ).
This has completely turned market expectations around the quantitative tightening cycle. Just two weeks ago, the market priced the chance of higher interest rates in July at 78%. Today there is a 70% chance of cuts of 1.5% or more, and a 100% chance of cuts in any capacity.
The comparison between the different forecasts can be seen in the diagram below:
Gold price breaks $2,000
The tapering of the quantitative easing cycle and a return to the promised land of rate cuts has sent risk assets north.
Three months ago I looked at what a dovish flip could do for gold in 2023. We’re starting to see the response, investors are buying the metal as the chances of an inflationary environment in the future (or a higher one than it currently is) expand with the increased likelihood of interest rate cuts.
It’s the first time the shiny metal has breached $2,000 since February 2022. Before that, it hit the mark in July 2020 — the former when Russia invaded Ukraine, and the latter amid the first wave of covid lockdowns.
But that’s not the only thing driving it up. There is also the fact that investors in times of uncertainty run to safe-haven assets. It has always been gold’s calling card, and while its price performance hasn’t exactly mirrored these periods – see the chart below – the metal has generally acted as a good hedge.
And perhaps there is no greater threat to stability than weakness in the banking sector. We’ve seen it in abundance in recent weeks, and gold has taken its chance and run with it.
What’s next for the price of gold?
Going forward, it is difficult to say what will happen to gold. Personally, I continue to hold some of it as a hedge in my portfolio, despite its recent correlation with stocks in particular.
Over the long term, gold has lagged the risk assets, especially over the past decade. But if you are looking for returns, the boomer asset that is gold is not for you. This is a risk diversification play and a way to allocate a portion of your portfolio to something that is (relatively) uncorrelated.
The current environment, with more rate cuts on the way, inflation still high and a banking sector rapidly turning into a circus, appears an exciting set-up for gold. It’s a friendly reminder of why investors have held onto it, even if it requires sacrificing some yield.
Gold is one of the oldest investment assets in the world for a reason. And it’s boring – just as it should be. Investors have been running toward the sad story in recent weeks, and it may continue to do so going forward.
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