For an asset touted as a hedge against inflation, gold’s doing pretty well right now. The metal is off to its best start to the year since 1974 even as expectations for gains in consumer prices are near their weakest since the global financial crisis seven years ago.
That’s odd. Gold has soared during times of high inflation in the past. In the late 1970s when annual US consumer-price gains were on their way to a peak of almost 15%, it had its biggest ever rally. One reason for the shift now is that low inflation may be a sign the economy remains weak, deterring the Federal Reserve from tightening policy, Bloomberg reported.
“Gold is a great inflation hedge when you need it to be, particularly when interest rates won’t protect you,” Adrian Ash, head of research at online-trading service BullionVault, said in London. “Any inflation right now will be seen as a sign of growth, and that could be negative for gold if faster Fed rate hikes follow.”
As a result, stagnation fears appear better for gold than signs of inflation. The correlation between a gauge of anticipated inflation, the five-year break-even rate over 120 days, and the cost of the metal has flipped from positive to negative, to reach the strongest inverse relationship in more than 12 years, according to data compiled by Bloomberg.
Gold has surged as investors piled in, pushing the metal into a bull market this month. Holdings in exchange-traded funds backed by the metal are up 18% this year, increasing at the fastest pace since 2009. Investors bought into the funds for 18 straight days, the longest spree in five years, according to data compiled by Bloomberg.
Deflation Good for Gold
Adding to the allure are fears that policy makers are losing traction over economies. “Gold does well when central bankers appear to be losing control, and in the present environment that means signs that deflation is getting a grip,” said Matthew Turner, a precious metals analyst at Macquarie Group Ltd. in London. “Any signs of inflation will be broadly welcomed as a sign economies are on the right track.”
Monetary authorities responsible for about two dozen countries around the world have dropped policy rates below zero to try to revive economies. The Bank of Japan adopted negative rates this year, joining counterparts in Denmark, the eurozone, Sweden and Switzerland. About $7.9 trillion of sovereign debt also offers sub-zero yields.
Even the US may now be saddled with a “deflationary bias” making it harder for the Fed to achieve its price targets, according to research the central bank published this month.
The resulting low or negative rates provide another driver for buying gold.
