The rise in gold prices to $1750 an ounce, as I write, makes impeccable macroeconomic sense. After all, the Federal Reserve has increased its balance sheet by 65% since March alone, a policy response to the pandemic echoed by all the world’s chief central banks. Governments around the world have enacted epic levels of stimulus, even at the cost of budgetary prudence. This combination of money supply expansion, fiscal stimulus and rising government debt is bullish for gold, especially at a time when real interest rates in most of the world’s major economies are negative, which has slashed the opportunity cost of allocating to gold in global multi-asset portfolio.
This does not mean that the world is one the precipice of a hyper-inflationary nightmare. Au contraire, in fact. The US five year inflation breakeven has fallen from 1.8% in late December 2019 to 1.4% now, suggesting that there has been a slump in inflation expectations. After all, Wall Street remembers hedge fund legend John Paulson’s post-Lehman uber-bullish gold trade hemorrhaging money after the post 2008 spasm of money printing by the Big Four central banks – leading to secular stagnation, not a rise in inflation. This was the reason gold peaked at $1930 an ounce during budget battles with a Republican Congress and then entered a protracted bear market that saw prices fall by 40% over the next seven years.
The gold bulls argue that 2020 will not follow the pattern of the post-Lehman decade for two reasons. One, the sheet magnitude of the economic shock and debt buildup created by the COVID-19 pandemic will force governments to seek to reflate their economies to revive economic growth and reduce real debt burdens. Two, rising nationalism, protectionism and the disruption of global aviation, trade and supply chains could trigger inflation in certain industries. This is the macro logic that will distinguish the 2020’s from the post Lehman decade. This macro logic also suggests that the price of gold can rise well beyond $2000 an ounce, as there is every reason to believe fiscal/monetary stimulus will rise around the world as the worst economic slump since the Great Depression devastates government, corporate and consumer finances.
On the charts, gold shows all the hallmarks of a bull market and gold ETF inflows have risen to record levels in the first five months of 2020, a bullish real time indicator since pensive trackers are such a critical component of investment demand for Auric. True, jewelry demand for the wedding season will plunge due to the Indian lockdown but global macro metrics suggest the bull market in gold will continue.