Trifecta for Gold

If you had to pick 3 things that drive the gold price many would say inflation hedge, safe haven in economic turmoil, and war.  As we sit here today, 3 August 2022, the headlines are screaming all 3. Each is not a simple nor certain proposition and each could have books written to break them down right now. But it is a time to briefly address each whilst all 3 are making headlines.

Yesterday our own central bank, the RBA, hiked Aussie rates by 0.5% to 1.85%.  That compared to the US Fed’s 2.25-2.50% is still making the USD more attractive and hence our dollar fell slightly on the announcement, particularly when everyone was expected it.  The RBA however upgraded its inflation forecast higher again to 7.75% to the end of the year and so whilst Aussie wages grow at a third of that and servicing mortgages keeps rising there is more pressure on consumer spending and hence growth.  At the moment we are not feeling the full effect of that thanks in part to what @AvidCommentator calls the ‘home ATM’..

“What is often overlooked in the debate about interest rates and inflation is home equity withdrawals, which amount to ~4.6% of GDP

The U.S topped out at 2.6% pre-GFC

As long as banks/homeowners are comfortable using homes as an ATM, inflation may remain stronger than expected”

You can see the double edge sword in that of course.  The more people redraw and spend, the more inflation stays (including the spiralling ‘buy now before inflation goes up’ we discussed last week).  The more they redraw the less equity at a time when serious, not doomsday, analysts are calling for large falls in Aussie property prices.  Just yesterday AMP Capital’s chief economist, Shane Oliver said:

“The pace of decline is gathering speed, so it’s conceivable we could be seeing monthly declines of 4 per cent in a few months which would surpass the peak monthly increase of 3.7 per cent in March last year…..You have to say it’s pretty worrying as we’re only three months into the downturn and prices are already falling this fast. The previous occasions where it came on this rapidly and early on was during the mid-80s before a severe recession and during the GFC, but the RBA were able to turn it around quickly by cutting rates…..But there’s not much relief on the horizon just yet, so there’s a high risk of further acceleration in price declines as the possibility of a rate cut is more than a year away.”

Those with money in the back are seeing banks not passing on these cash rate rises and hence are going backwards at a shocking rate where their cash earns 1% but inflation is 7%.  Gold of course is the age old inflation hedging alternative money to fiat money going backwards in the bank.

Last night we saw more red on Wall Street and likely more here today as a reminder that the market may have been getting ahead of itself with expecting a pause or pivot from the Fed any time soon.  A number of Fed FOMC members were in hawkish jawboning mode last night with comments like they are "nowhere near done" on fighting inflation and its "far too high" and “It really would be premature to unwind all of that and say the job is done,” and “I also think that we’ve been with this high inflation for a while, and really getting too confident that we’ve already solved the problem,” and that they need to “keep committed until we actually see it in the data” and another "hasn't seen anything suggesting inflation is leveling off." 

So you get the gist.  Why markets turned red is that this rally we’ve seen in shares and bonds has been on the back of a priced in expectation that the Fed will have to pause or pivot rates sooner than they are letting on.  Now of course the last 2 words there are critical. They have 2 tools – actually doing stuff and talking about doing it. This all coincided last night with yet more economic and jobs data warning of recession dead ahead. This jawboning could well be just that, but the fact remains, if they keep hiking into weakness, something will snap and again gold becomes the safe haven bid.

Finally, you may remember a war that has fallen off the front pages for more important things like swimming loves scandals, but the Ukraine conflict continues unabated and threatens to continue to disrupt the world order. What is now grabbing headlines is a very serious escalation in the Taiwan situation with US House speaker Pelosi visiting and prompting a serious rebuke from China and full deployment of a military response now surrounding the island. Super power sabre rattling just reached a new level but from an economic point of view it has massive implications for how Australia gets through this recession threat.  Let alone a Chinese economy languishing amid COVID lockdowns and a full on property crisis, should Australia’s alliance with the US see further sanctions of our goods in retaliation we lose the gift that was China in our last flirting with a real recession in the GFC this time. Wars too now have a currency element and we have a world of nations being attacked by a rising US dollar with seeming no regard from the Fed.  At some stage that too can snap and it is no coincidence that these nations are shoring up their reserves with gold as we reported yesterday.

As always, balance your wealth in an unbalanced world.  This is one seriously wobbly world right now.