Will Stagflation Break Gold's Stagnation?
Sunshine Profits | Sep 10, 2021 03:56PM ET
One word shakes the markets, causing a lot of fear: stagflation.
Is it coming? Will it push gold out from stagnation? Let’s find out.
One of the greatest risks cited currently by the markets is GDP surged 12% in Q2 2021 year-over-year), as the chart below shows. So, why bother?
Well, although a has recently turned negative .
Among negative surprises, is the bond yields may not be as nonsensical as it may seem.
I warned my readers a long time ago that the recovery from the coronavirus , a slowdown in China’s economy, and without government stimulus.
When it comes to the price front, it’s also highly uncertain. Inflation has softened a bit in July, but it remains high, and I’m afraid that it could prove to be more persistent than it’s believed by the Fed and some analysts. The latest Empire Index, mentioned above, tells us: although the index of manufacturing activity fell more than expected, the inflationary pressure strengthened. As the report says, “input prices continued to rise sharply, and the pace of selling price increases set another record.”
What’s disturbing in all this – and this is why inflation may stay with us for longer – is that the Fed is downplaying the inflation risk. And even interest rates abruptly, choking economic growth off.
Going into specifics, the Fed’s view that inflation is transitory mainly rests on the belief that price increases are caused by supply disruptions related to the pandemic. However, inflation is not limited to just a few feverish components — it’s broad-based. In particular, the cost for shelter, the largest component of the CPI, has also been gradually rising, even though the owner’s equivalent rent component doesn’t reflect properly the recent record surge in U.S. home prices (see the chart below). If this is not inflation, I don’t know what is!
The increase in house prices is important here, as Gita Gopinath, chief economist and director of the IMF Research Department, admitted at the end of July: “More persistent supply disruptions and sharply rising housing prices are some of the factors that could lead to persistently high inflation.”
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What does it all mean for the gold market? Well, stagflation should be negative for almost all assets. When we have a stagnant economy coupled with high inflation, stocks and bonds are selling off together. In such an environment gold shines, as it is a safe haven uncorrelated with other assets.
Stagflation is so terrifying because the Fed won’t be able to rescue Wall Street simply by cutting interest rates, as it could only add fuel to the inflation fire. The only viable solution would be to engineer another ‘portfolio diversifiers as gold .
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