The Gold Price Just Keeps Going Up and the U.S. Election Can Drive it Even Higher
The precious metal is outperforming most asset classes and economic conditions seem poised to push it even higher.
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Gold has always been seen as the weaker, or rather, the boring sibling of the precious metals space, especially as the likes of bitcoin, ether and other cryptocurrencies emerged over the years, labelled as "digital gold," taking away its shine — no pun intended. After three years of more or less being flat, gold is up 35%-plus this year and outperforming most asset classes, even the most sought-after S&P 500 that is up 21% year to date and, dare we say it, the Nasdaq, which is up only 25% year to date with all its AI and technology-driven products! So much for being boring.
Its alternative digital sibling, bitcoin, has been outshining gold recently after its latest breakout as it is up about 60%-plus for this year. But then, bitcoin is a different risk asset altogether. As much as we would like to call it "digital gold," the fact is that, back in August during the dollar/yen crisis, it fell alongside all other risk assets while gold did not. That is a sign of a true safe haven asset. At the end of the day, bitcoin may benefit from the fiat currency debasement theme, but it is still a leverage risk asset that trades on liquidity in the system.
Gold has broken away from a lot of its traditional relationships, namely bond yields and the dollar. Since the Russian war invasion, gold has really not moved with these factors as such. Despite higher yields and a stronger dollar, gold continues to rally as central banks around the world hoard up in gold as their strategic reserve. There are talks about how the BRICS nations could eventually use gold as a way of trading with each other, away from the dollar so to speak. Either way, the central banks of these contentious nations seem to be moving away from UST and assets and into gold and other alternatives.
Gold is also seen as a recession hedge. Back in August, when markets were getting nervous on the carry trade, central bank liquidity was unwinding and U.S. economic data was rolling over post summer hurricanes and manufacturing weakness, gold kept moving higher. As the U.S. economic data seems to have turned around and showed a strong labor market and resilient economy, it has not given up its gains. So, the momentum in gold is very strong. As we head into the U.S. presidential election next week, there is talk of even more fiscal spend and debt issuance. The market seems to be sure that debt is only going up which, together with fiscal spending, may cause another boost to inflation. If that is the case, hard assets should appreciate even more.
The Fed was too scared to miss its window to cut rates in September and they rushed to cut 50 BPS despite the data not asking them to do so. Since the first Fed cut, the U.S. bond market has called the Fed's bluff, and yields have rallied from 3.5% to 4.3% today as the U.S. bond market has priced out most of the cuts for this year. The Fed really seems to be in a pickle. It needs to cut rates to save its debt interest expense and mortgage rates, but inflation is still averaging around 3% so cutting rates now before any crisis has emerged at a time when U.S. national debt is at $36 trillion and counting, seems to be a path to disaster. The bond markets have picked up on this as the term premium has rallied.
With the highest debt post WWII going into an election with even more debt needed to boost growth, one wonders how much quantitative easing the Fed will need to do the next time we have a wobble in banks or the repo markets. Perhaps gold has seen the writing on the wall for some time.
At the time of publication, Bengali had no positions in any securities mentioned.
