In the heat of monetary policy changes by central banks, especially the Fed, gold may face the ideal moment to reignite the markets. If central banks manage to control inflation and keep it moving steadily towards 2%. There would be little justification for investing in the target gold metal, At least so for dollar investors, who can buy inflation-linked bonds with yields of around 2%.
However, it is by no means clear that central banks are going win the battle against inflation in an easy way. At least, this controversy is understood as a return to the central level of 2% monetary institutions. “This is possible if citizens’ long-term inflation expectations, and thus wage negotiations, remain weak,” says Bert Flossbach, co-founder and manager of Flossbach von Storch.
But if inflation remains very high next year due to massive aid packages to offset the loss of purchasing power from energy prices, the success story of fighting inflation using interest rates will be difficult to sustain. This is especially true if interest rate increases cause collateral damageAs has recently happened in the UK”, says Flossbach.
For Flossback, there could be a loss of confidence in the value of money, if it is shown that monetary policy is reaching its limits in a phase of imported inflation and high indebtedness, with central banks not having effective weapons to fight inflation. Huh. ,weakness The pound sterling, yen and euro indicate that a loss of confidence is already starting to become a problem”, he deepens.
The Bank of England is fighting debt-funded expansionary fiscal policy, the Bank of Japan is fighting rapid debt, and the ECB is fighting His own promise to preserve the euro (“whatever it takes”). The Federal Reserve has more effective options. Interest rates are already high enough, the economy is still in good shape, and the geopolitical situation is better than in Europe or Japan.
more favorable winds
To all this, we must add that the strength of the dollar, which has acted as the safe haven asset par excellence, seems to have collapsed. Something that has historically also favored the precious metal in the past and for which many experts are already clearly jumping overboard. “Dollar Gains and Bond Yields” weighed in goldsays Jim Wyckoff, an analyst with Kitco Metals. “Last week’s gains could have helped from bargain hunting by the bulls minor recovery in gold“, he points out.
“It seems that gold is a strong resistance at the $1,800 level, with good support in the $1,750 area,” Edward Moya, a senior analyst at OANDA, explained in a note. For context, bullion posted its best weekly gain since March 2020 for the past five trading days. Entered, the US is expected to slow rate hikes following downward pressure.
Fed Vice Chairman Lael Brainard joined Governor Christopher Waller in statements last Monday to signal that the Fed is ready to begin moving small rate hikeEmphasizing what Brainard called the central bank’s “resolve” to raise the value of money in order to counter the rise in inflation.
Although gold is considered inflation protectionRising rates reduce the attractiveness of bullion as it pays no interest. Fed funds futures traders see an 89% chance of a 50 basis point increase at the central bank’s December meeting, with only an 11% chance of a 75 basis point increase.
However, there is a question mark over whether the Fed can defend the world’s fiat money on its own. “The strength of the dollar is fast becoming a burden on the economy US and emerging markets with dollar loans,” says Flossbach.
The expert believes that the US housing market is starting to suffer under the weight of high mortgage interest rates and significant retirement savings of US citizens are starting to erode. “Therefore, the Fed must also be careful not to being too harsh interest rates,” he says.
The Fed’s room for maneuver is also limited in this regard and the US dollar, which currently serves as a stability anchor, has only been propped up by “in God we trust” since the abolition of the gold standard. Is. “As has happened many times in the past, gold will then become the most important currency of last resort“, ends.