Gold has traditionally been a safe bet during crisis mode for economies, historically we have seen a flood of gold investors looking to offset existing positions or largely looking for a quick buck. Gold prices have always fluctuated with inflation, we have seen it time and time again. Inflation comes in a few varieties but the one that effects gold the most is monetary inflation which is generally caused by the sudden increase of money in the economy.
The most obvious candidate for this occurrence is quantitative easing, when a central bank decides to print money through quantitative easing, we quite literally have an increase in the total amount of dollars on hand, and historically inflation levels rise. The exception to this rule is that the brief stimulus packages that we have seen in the past do not consistently influence inflation levels over the long term. Inflation has remained consistently low for over a decade with many economies struggling to reach 2% inflation after the events of the Global Financial Crisis, and only just reaching inflation targets in the most recent years. Which again is a cause for concern, the relationship between money supply and inflation is a positively correlated one. So, in a period post GFC where we have seen GDP growth continue, why has inflation remained relatively low compared to the money supply? Naturally other economic activities do explain this phenomenon, when physical cash is printed it will affect inflation, however in the FED’s case it was digital currency, until this currency has a physical its effects aren’t realised.
The question to ask is how will the new wave of QE that we are seeing now affect the economy? Large pumps of exceptionally large volumes of money are to be injected directly into the economy in physical cash. This is a very different process that we are used to seeing what we have seen before, especially in the US based case which is anticipating a 1 trillion-dollar injection to try starving off a coronavirus recession.
Ultimately these questions on inflation are apart of the reason we are seeing gold prices fluctuate, but not all the reasons for it. For all intents and purposes Gold should be rising in value right now, dropping bond yields and crashing stock markets indicate a poorly performing economy. Nothing new there but historically the haven of gold would rise and that has occurred to begin with but now drops and swings are occurring, now where near as wild as stocks but none the less its still been volatile.
The way I see it there are two possibilities:
- Institutional investors are in need of cash to meet the margin requirements on leveraged products they have currently in the red. Gold is pretty liquid and easily converted to cash, so perhaps we are seeing a portion of investors exchanging goods, its plausible and explains the scenario.
- The uncertainty on inflation fallout from stimulus packages has investors concerned, and the idea of gold and the safe haven has started fleeting.
Naturally I’m speculating as much as the next person when it comes to this opinion piece but there is logic behind the possibilities.