Will stagflation lead to a turnaround in gold price this year?
Gold’s traditional role as a hedge against inflation has faltered all year, but growing risks that the
global
recovery could stall as price pressures rise may signal a turnaround for the precious metal.
Inflation had already been increasing on the back of unprecedented pandemic-era stimulus and as the
rollout of vaccines spurred the gradual reopening of some countries. The surge in energy prices that’s
accelerated over the past month on fears of shortages, on top of a broader rally in commodities, is now
stoking concerns about sustained cost pressures.
Yet bullion is heading for the biggest annual decline since 2015.
Historically, gold has been viewed as an attractive investment when ination climbs, with the metal
tripling through the late 1970s as U.S. consumer-price gains headed toward a peak of almost 15%. But
bullion is also sensitive to interest rates, and investors are betting that central banks will soon
start
reining in stimulus and boost borrowing costs. That’s weakened the case for holding the precious
metal.
“Gold, short-term, is not a good hedge against ination -- against popular belief -- longer term it does
better,” said Wayne Gordon, executive director of commodities and foreign exchange at UBS Global
Wealth Management. “Hence, we don’t see it outperforming unless growth disappoints and there is a
broader risk off, which leads to a reversal of monetary policy trends.”
This time though, investors are grappling with the possibility of stagation -- the combination of
slowing growth and rising prices that hit major Western economies in the 1970s -- creeping back into
markets with the recent surge in energy costs. Supply chain turmoil has also boosted the price of many
goods for consumers.
“There’s certainly some decent gold upside if the narrative changes to one of persistent ination and
slower growth,” said Nicky Shiels, group head of metals strategy at MKS (Switzerland) SA. “Stagation
would force a macro rotation out of typical reation assets or commodities like oil and copper, and into
the precious sector.”
European Central Bank Governing Council member Yannis Stournaras on Thursday pushed back on the
idea of stagation. Earlier in the week, President Christine Lagarde said the bank will ensure that
ination expectations are anchored at 2%, and warned “we should not overreact to supply shortages or
rising energy prices, as our monetary policy cannot directly affect those phenomena.”
Federal Reserve Chair Jerome Powell and counterparts at the ECB, Bank of Japan and Bank of England
have voiced cautious optimism that the supply-chain disruptions will be transitory. The U.S. central
bank could start scaling back asset purchases in November, and ofcials have signaled a growing
inclination to raise interest rates next year, which curbs the appeal of gold.
Ination, according to the Fed’s preferred measure, was 4.3% in the 12 months through August, well
above the central bank’s 2% target. The consumer price index remains above 5% after surging in June
by the most since 2008, although one factor behind outsized gains is the rebound from the depths of
last year’s pandemic lockdowns.
Investors will be closely watching the U.S. jobs data for September on Friday. Prolonged high
unemployment is another signier of stagation and has the potential to delay rate hikes given the Fed
has stipulated maximum employment as one of the criteria for liftoff.
Bullion has lost about 15% since its record above $2,075 an ounce last year on a resurgent dollar and
as rising bond yields damp the appeal of the non-interest bearing metal. Silver has also suffered losses,
and is trading near the lowest level since July 2020. The drop in prices could be a buying opportunity for
those who still believe in gold’s role as an ination hedge.
“It’s not a question of whether ination will have a severe impact, but a question of when,” said
Gnanasekar Thiagarajan, director at Commtrendz Risk Management Services. “So investing in gold
and silver is the most ideal thing because gold is an inationary hedge and silver tends to appreciate
much more when gold starts rallying."
Edited by : A.Madhuri