Stock markets are back to record prices, and bond yields exceed 1.5%.
According to Rob Haworth of US Bank Wealth Management, this is because market players are optimistic, in the hopes for a faster economic recovery. However, if there are any problems with the ongoing introduction of vaccines, or if there are problems with economic activity, the optimism will dry out, which will lead to a rise in the price of gold.
In addition, if inflation starts rising by September as expected, the Fed has to respond with increased interest rates and tighter financial conditions, which, of course, will push gold even higher.
But despite the fact that prices may rise in the near future, Haworth said profits from gold will be limited, at least until the end of 2021. He added that in the short term, the best instruments to hedge inflation are cyclical assets such as base metals and oil.
In fact, at the beginning of 2021, demand for copper and oil soared. Copper prices are holding near 10-year highs, while this week, oil prices hit a three-year high, reaching nearly $ 70 a barrel due to growing demand and geopolitical uncertainties holding back supply.
Economists also predict that copper will continue to rise until the end of 2021, as the opening of the global economy, further development of renewable energies and increasing demand for electric vehicles will drive growth and demand for the metal. At the same time, they assume that supply will remain limited due to the decline in production at the mines.
This type of inflation, which may occur in the second half of the year, will be driven by cyclical demand. In short, cyclical commodities, such as oil, have more room to grow.
But for now, the gold market depends on how the Federal Reserve reacts to current market conditions. Since the Fed does not plan on intervening yet, bond yields should continue to grow. Accordingly, gold will remain low as well.
Therefore, for prices to really rise, consumer prices must also increase, without control, just as they did in 1970, when inflation rose to double digits. And despite the fact that inflation will jump in the second half of this year, the scenario that happened five decades ago is unlikely to be repeated.
Back in 1970, wages rose at the same time that prices increased. But today, it does not rise at the same rate, which leads to a reduction in demand, as a result of which prices fall.
Gold is often seen as a hedge against inflation, but there is a higher correlation with cyclical commodities in the short term.
