Follow the money!
A bullish gold view is finding some notable mainstream support:
Gold’s Stars Continue to Align
by Russ Koesterich of BlackRock, 10/17/24
Yet another victim of the CPI=inflation fallacy:
“Many investors, including myself, were frustrated with the performance of gold in 2021 and 2022. Amidst the biggest surge in inflation in 40 years, gold traded sideways, with a total return close to 0. In contrast, in the current year when inflation is finally normalizing gold is having a stellar year.”
Of course it wasn’t inflation, but consumer prices, that surged then normalized on that schedule. The initial surge of inflation began not in 2021-2022, but in 2020. You had to be living under a rock not to have heard about the multi-trillion-dollar monetary blitz. It just took a while to filter through to consumer prices. Gold responded in real time.
And once it did make its way into consumer prices, policymakers began to take notice. In 2022 inflation receded. In 2023 and 2024 that disinflation filtered through to consumer prices and policymakers again began to become complacent, dialing back QT and talking up rate cuts. Inflation is again a problem and gold is responding accordingly.
Rising consumer prices are not inflation; they are the exhaust fumes of inflation.
Inflation is not normalizing now. It is happening now. It’s obvious in stock prices, and yes, in gold prices. Up next: Consumer prices.
It may be time for gold to take a rest and process its gains. It consolidated gains for three years from its late summer 2020 highs before taking off in 2024, and this leg up is now similar in size to the last. Sentiment is now a bit on the frothy side as bullish press moves from the gold bug tributary into the mainstream.
The stocks:gold ratio is in the neighborhood of prior reversals since that time:
This suggests that gold may be about to pass the baton to stocks for a while.
Fundamental support in the form of fiscal recklessness and geopolitically motivated dedollarization remains solid for the foreseeable future, but near term policymakers may be growing cautious about further rate cuts given the lack of any visible threat to employment. There is also a growing likelihood that inflation begins to become visible in lagging consumer price based metrics that policymakers follow, further adding to this caution. In short, rate cut mania may be waning. The more the Fed worries about inflation, the less gold has to.
Washington’s deficits and Wall Street’s craving for easy money will keep pressure on the Fed in the other direction, so it’s not as if the Fed is going to get serious about monetary restraint. I don’t see any grounds for a major bear market in gold prices; more a period of chopping sideways.
So “the dollar” in the commonly used forex sense has been rising for a while. Today it actually rose in the broader sense. It rose not only against a basket of foreign currencies, but against US stocks, foreign stocks, copper, gold, silver, platinum, oil, and most of the bond market. While the financial media lament that all these things were “down” today, Financology’s view is that when a broad range of disparate assets move in the same direction, it means your units did most of the moving, so in this case we take the glass-half-full view that dollars went up. Good news for the inflation-beset ordinary citizen.
Not the worst news for those whose portfolios declined in dollar terms, either … the declines were less than they first appeared.
But it’s just one day, among many of the opposite type. Many more like this would be required to nullify that inflationary bulge en route to consumer prices the above post identifies. It’s possible, but far from assured. It would most likely require what the financial media refer to as a “hard landing”.
I have been saying for several quarters that the financial media narrative of consumer inflation going quietly into the night while “the economy” experiences a “soft landing” or “no landing” is a fantasy. It at minimum would require a meaningful cessation or reversal of the decline of the dollar, visible in broadly rising stock and commodity prices … that is, a lengthy period of sideways asset prices or a bear market. Nothing I’ve seen over those quarters has changed that.
There’s a lot of media commentary to the effect that gold has been defying the usual rules, rallying on dollar strength and rising real yields. They’re both based on fallacies.
One is that the “strong dollar” seen in forex is somehow definitive. The dollar can be stronger than a basket of other currencies and still be weak in the bigger scheme of things. The yen and euro for instance aren’t the most solid pillars of strength for comparison. Broaden the basket to other assets and the dollar hasn’t looked so strong.
The other is that nobody really knows what “real yields” are. Subtracting past inflation from future nominal yields is no more logically valid than asking how many apples you will have left if you start with five bananas and subtract three oranges. And as we’ve been discussing, the CPI=inflation assumption is just that … an assumption widely held on nothing more than repetition. Bottom line; gold very well could be tracking real yields and we just wouldn’t know it yet. If, as I argue, inflation is much higher than current CPI, real yields are much lower than acknowledged, and higher gold makes perfect sense.
The sudden outperformance of stocks relative to gold may not be the fundamental development it’s sometimes cracked up to be. Until this week, it was stocks underperforming gold. It’s often helpful to take dollars out of the equation to see underlying relationships more clearly.
When we did this a couple weeks ago, we saw a multiyear pattern of stocks trading sideways in gold terms, bouncing off a fairly well defined floor. The stocks:gold ratio had hit the floor. The persistence of this pattern led me to comment above that gold was likely to “pass the baton” back to stocks for a while. I think that’s exactly what we’re seeing now.
As tempting as it may be to read current news headlines into every market movement, they’re often nothing more than a catalyst for something they was ripe to happen anyway. This may be a much more technical matter. If it continues to hold, we should expect to see a period similar to past ones where stocks gain on gold, then roll over, handing the baton back to gold.
Here’s the original chart along with an updated version, showing how it has done exactly what we expected:
Charts from Stockcharts.com.
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