January 17, 2020
This should be the year, for the first time in a long time, that gold prices become driven by the "inflation hedge" attributes, moreso than the "safe-haven/fear trade" attributes. If that's the case, and if we do indeed finally get a push in inflation, gold could be in for much higher prices. It will be the manifestation of all of the central bank intervention of the past decade.
The market poured into gold early on in the financial crisis, and was dead wrong about inflation (it didn't materialize in a world of global indebtedness).
So, what do the inflation prospects look like now?
Remember, back in December, Jay Powell, at least verbally, committed the Fed to holding off on any future rate hikes until inflation "persistent and significant." In short, they've told us, they are staying put (sitting on their three rate cuts) until inflation bubbles up and proves to be sustaining at or above their 2% inflation target.
If you consider the scenario of above average economic growth coming down the pike this year, the Fed is clearly in position to get behind on inflation – which I think they are okay with (they think they can beat inflation, and aren't so convinced they can beat deflation).
This makes the outlook for gold very interesting.
At the highs last Friday, gold has moved up 10% from the day Powell made those comments in his December press conference. And often times it takes a catalyst to really things moving. We may have had that with the escalation with Iran to begin the year.
So, was this an abnormally large move in gold? Is it something meaningful?
It turns out, this type of aggressive move has some rare company. Take a look at this chart I worked up on the 20-day moves in gold since the beginning of the Financial Crisis. This $146 move in gold puts it in what I called the "big event zone" (Iran blowing up oil tankers, the surprise Brexit vote, the ECB intervening to avert sovereign debt defaults in Europe, the global financial crisis).
If this is a real "inflation hedge" trade underway here in gold, we should be in for much higher gold prices.