The only other time we’ve seen anything like this kind of gap was back in 2008, when there was more than a 3% difference between the headline CPI rate and the 10-year breakeven inflation rate.īack then, like now, gold went through a corrective period, at one point falling by approximately 20%. Source: The Perth Mint, St Louis Fed, Bureau of Labor Statistics Gap between current CPI rates and 10-year breakeven inflation rates 2003 - 2021 This can be seen in the chart below, which also highlights the US dollar gold price during this time. That is the largest gap in 20 years between the current CPI rates and 10-year breakeven inflation rates. This can best be visualised when considering the fact that while headline CPI rates hit 7% in the United States by the end of December 2021, the 10-year breakeven inflation rate, which measures what the market expects inflation to average in the next 10 years, was just 2.56%. What makes the inflation outlook so interesting for gold going forward is that, at present, the market is expecting inflation rates to rapidly decelerate, and to stay low in the decade ahead. Source: The Perth Mint, Australian Bureau of Statistics, World Gold Council Australian inflation and average gold price returns (%) 1971 to 2021 While gold doesn’t always go up when inflation is running hot, it does have one of the best track records of any asset class as a hedge against rising consumer prices.Īs an example, analysis conducted by The Perth Mint shows that the gold price in Australian dollars has on average risen by just over 20% in nominal terms in years local inflation was 3% or higher. One factor to keep a close eye on in 2022 is inflation. Movements in the stock market and the value of the US dollar, as well as broader economic conditions also influence demand for, and therefore the price of, the precious metal. This data highlights quite clearly that higher interest rates themselves are not necessarily bearish for gold. Source: St Louis Federal Reserve, The Perth Mint, World Gold CouncilĪpart from the mid-1980s, when gold fell by 10%, and a very small decline between 19, gold prices have tended to rise, often quite considerably, in periods the US Federal Reserve has increased interest rates.Īcross the six rate hiking cycles highlighted in the table above, the gold price has increased by an average of almost 100%. Rate hike cycles and US dollar gold price returns – 1972 to 2021 This can be seen in the table, which looks at rate hiking cycles and movements in the US dollar gold price over the last 50 years. In reality, history demonstrates that gold prices have typically tended to rise alongside increases in interest rates. Therefore, if the interest rates one can earn in a bank account or term deposit are on the rise, then the opportunity cost of owning gold is going up, which should be bearish for the gold price. The logic is simple enough - gold doesn’t pay an income. In theory, gold prices should be on the back foot in 2022, with higher interest rates and the conclusion of the various quantitative easing programs undertaken by global central banks to support economies through the pandemic representing potential headwinds for the precious metal. Higher interest rates Won’t higher rates sink gold? On top of these non-precious metal specific factors, gold itself was also overdue for a correction, having rallied by approximately 70% from below USD 1,200 to more than USD 2,050 oz between late 2018 and late 2020.Īnd while for now all eyes are on the Ukraine, there is another catalyst for higher gold prices that may soon come to the fore. Cryptocurrency price strength for most of 2021, with Bitcoin at one point pushing up toward USD 70,000 per coin.An incredibly strong rally in equities, with the S&P 500 up more than 25% in 2021.Stronger than expected economic growth.A rising US dollar, which was up 6% in 2021.Several factors drove this correction, including: The rally comes after a roughly 15 month period in which gold prices were in a corrective pattern, having fallen by about 15% between August 2020 and January of this year. Gold prices have soared in recent weeks, with the conflict between Russia and the Ukraine at one point pushing prices back above USD 2,000 and AUD 2,800 per troy ounce (oz).
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