Gold the hedge to see a surge of inflows

Gold and silver had another very strong night last night as shares again fell heavily.  Whilst in part this continues geopolitical anxiety over the Ukraine, the bigger driver appears to be the US economy and by extension the global economy as it is the same theme of central bank overreach or ‘policy error’ tightening into a weakening economy.

It was again St. Louis Fed President and FOMC member James Bullard who was last night publicly imploring his fellow members to be much more aggressive in tightening policy, calling for both an immediate 50bps rise in rates but also completely reverse from the current QE (printing) to QT (selling the bonds they bought with newly printed ‘money’ into the market). 

To add to this we had the US Secretary of State warning the Russian invasion threat was still very much alive and indeed posited they will establish some pretext to invade of their own making:

"This could be a violent event that Russia will bring on Ukraine, or an outrageous accusation that Russia will level against the Ukrainian government.

"Russia may describe this event as ethnic cleansing or a genocide making a mockery of a concept that we in this chamber did not take lightly," he added.

"We believe these targets include Russia's capital (or) Ukraine's capital Kiev, a city of 2.8 million people,"

Goldman Sachs, whilst acknowledging the threat of war supporting gold, believe it is fundamentally the economy as the main driver:

"Russia and Ukraine risks have contributed to the most recent rally in gold. But we believe the gold real rates disconnect that began since early January and prior to last Friday gold was not correlated to oil and geopolitical risk proxies. Instead, we believe we are entering a macro environment where the gold and real rate relationship structurally breaks down as higher rates hurt growth and risky assets thus leading to more fear which, in turn, bolsters gold. In this scenario, the most important gold drivers are no longer US real rates but instead US growth dynamics as well as the dollar GDP value of major EM gold consumers. Gold is negatively related to US growth momentum as slower growth boosts recession worries and is positively correlated to EM growth and FX strength as it supports consumer buying - the 'wealth' effect"

And already money is starting to flow out of shares and into gold.  As JP Morgan noted last night:

"Retail flow has been on a moderating trend, with net buying totaling $3.4B this past week, largely in line with the last 12M average. Moreover, SQQQ (-3x NASDAQ 100) was the most popular security with net buying of +$233MM. As a result, NASDAQ 100 ETFs weekly net inflow (leverage adjusted) was -1.9 sigma below the 12-month average. On the other hand, gold ETFs saw strong interest (+2.8 sigma). In particular, GLD attracted over $100MM of net buying"

JPM believe we are on the cusp of a wall of money that will be exiting shares and into the likes of bonds and gold.  Despite what might seem intuitive, there has been record flows into US equities unabated on the already record flows last year.  But as we stare down the barrel of the Fed policy mistake they believe that is about to reverse in a very big way.

As one would expect at such an incredibly heady height, gold is looking relatively cheap and indeed cheaper than the other ‘safe haven’ of US Treasuries:

And as a reminder that despite the bad year US shares have had this year, by Warren Buffet’s favourite indicator, Total US Stock Market Cap v US GDP, they are still very very high and have ample room to fall significantly lower:

And as we posed earlier this week, with 2022 almost certainly to dish up a LOT of volatility, the correlation between volatility and the gold price is tight:

And gold is asserting itself as the safe haven of choice over Bitcoin:

We often remind readers that the truly incredible prospect for gold is the gargantuan difference between a $300 trillion paper assets financial market and the roughly $1.5 trillion of investable gold.  When the markets truly go from risk-on to risk-off and look for an inflation hedge AND safe haven, consider how $300 trillion fits into $1.5 trillion and remember the equation of Finance 101 between price, demand and supply.  Unlike fiat currencies and debt, gold has fixed supply as a hard asset.  Increase demand against fixed supply leaves only price as the only remaining variable.

On a final note, this is all happening whilst the Fed is still, right now, printing billions of USD every day and haven’t raised rates at all…. And gold just broke out of its pennant..