Heavy Weights Go Heavy Gold

Yet another night of red on Wall Street and more big names calling for worse to come.  Legendary billionaire co founder of the $65b hedge fund GMO has come out calling for a 50% crash in US shares and Goldman Sachs calling trouble ahead and recommending gold as a key investment right now.

83 year old Grantham last week came out saying he expects the S&P500 will plunge by 50% and no amount of Federal Reserve intervention could prevent it. The horse has bolted.

He believes the US is now in the midst of its fourth ever “superbubble”, joining 1929, 2000 and 2008, with the crash now inevitable:

“This time last year it looked like we might have a standard bubble with resulting standard pain for the economy,”

“But during the year, the bubble advanced to the category of superbubble, one of only three in modern times in US equities, and the potential pain has increased accordingly.”

“This checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time.”

“When pessimism returns to markets, we face the largest potential markdown of perceived wealth in US history.”

Wall Street giant Goldman Sachs have just come out bullish on gold and calling up to US$2500 for the safe haven metal. 

"We estimated that if inflation were to structurally move to 4%, gold could hit $2,500/oz based on the historical gold inflation relationship. We also estimated that gold would get somewhere close to this level if U.S. gold ETFs would move back to their 2011 highs. Therefore, we think there is considerable upside potential in gold in a scenario where inflation increases significantly,"

The Market Ear (TME) gave a good summary and added some charts that is worth repeating here for you. GS = Goldman Sachs…

“Goldman joins TME in being bullish Gold

TME said that it was time to revive the old safe haven asset Monday morning. Goldman joins the call today.

GS: "Get long gold on weaker US growth and resilient Ems [emerging markets]. In our view, this combination of slower growth and higher inflation should generate investment demand for gold, which we consider to be a defensive inflation hedge. In addition, we expect continued growth in EM dollar-wealth and a rebound in consumer and central bank demand for gold. As such, we are raising our 12 month gold target to $2150/toz from $2000/toz and are launching a long Gold (Comex Dec 22) trading recommendation" (Goldman Commodities)

Things can only get better

Gold spent 2021 in a fundamental soft spot. A combination of strong DM [developed markets] growth, underperforming EM's and a belief that inflation was transient kept gold caught in a fundamental soft spot, facing a fall in demand for defensive assets. Crucially, high growth and seemingly stable prices led to a surge across all risk-on assets, in particular cryptocurrencies. As a result, not only did gold face falling investment demand from investors no longer looking for a debasement hedge, it faced direct competition in bitcoin as a store of value.

Source: Goldman

Gold consumer and Central Bank demand has come off in the second half of 2021

Chart shows global gold demand - jewellery, investment and central banks, WGCe. Yes, things can only get better.

Source: World Gold Council

Gold - the break out in the making?

We haven't seen the shiny metal close here or higher since pre the November shake out. Gold is getting very tight inside the huge triangle like formation. There are few gold bugs around these days, but gold is one of the few assets that has managed to climb higher during the latest market rout. Gold volatility, GVZ, has stayed "depressed".

Source: Refinitiv

Gold rallies during rate hikes

GS: "Contrary to many investors' expectations, Gold has remained very resilient during the recent increase in US real rates. In our view, this is due to gold's status as both an inflation-hedging and a defensive asset. Indeed, Bitcoin fell 45% alongside high growth, loss-making equities during the latest risk-off rotation. Such a divergence between gold and real rates is common when higher rates might become a risk to real economic activity, raising the probability of recession and demand for defensive assets. Historically, gold tends to increase during rate hiking cycles, particularly when US growth starts to decelerate and EM dollar purchasing power holds firm".

Source: Haver

Gold is beginning to disconnect from real rates

Historically, gold tends to increase during rate hike periods when gold's negative correlation with long term real rates also tends to break down. This is already happening with gold displaying resilience to the most recent increase in US 10 year real rates.

Source: Datastream

Of course also: hedge against inflation and geopolitics

Oh my god, all stars are aligned...

1. Gold is a hedge against bad inflation. Last year, gold failed to respond to high inflation which was perceived to be transitory by the market. But what will happen if inflation becomes more permanent? Guess what? It works as a hedge!

Gold volatility - the forgotten convexity trade?

It is hard to find superlatives for the recent move higher in equity volatility. Sure, equities are all over the place as people suddenly woke up to the Fed "dilemma", rates moving, Russia possibly invading etc, but does that justify gold continuing to be boring? Gold volatility is up small over past sessions, but the gap vs VIX is now beyond huge.”