Gold should benefit from higher inflation

Gold should benefit from higher inflation

30 August 2022 from Carlsquare

Fed chairman Jerome Powell lowered investors' hopes on Friday, August 26th, by saying the central bank will have to raise policy rates to curb inflation. The yield on a two-year US Treasury bond rose to 3.38%, higher than the equivalent 10-year rate (3.11%), indicating that the bond market is pricing in a recession in the US. This is in line with Powell's observation that a weaker economy and labour market are needed to bring down the rate of inflation and that this could be painful for some households.

The fall in stock prices has erased some of the earlier gains in July in the stock markets, especially in Europe (save the FTSE index in London). Technically, the chart for the leading S&P500 index in New York looks ugly now, with a continued decline looking more likely than vice versa. Buyers need to come into the market and prove otherwise, and it didn't happen on Monday, August 29th.

The HYG ETF, which reflects investors' risk appetite for US junk bonds, is, like equity markets, still in a downtrend.

US HYG ETF (in USD), a daily five-year price chart

Source: Tradingview. Note: Past performance is not a reliable indicator of future results.

On Thursday, 1 September, the August Purchasing Managers' Index will be released from the US, but also from Japan, China, the UK, Germany, France, Italy, Spain, etc. The Purchasing Managers' Index should be above 50 to indicate continued growth in the economy. In the case of the United States (ISM for manufacturing), expectations are 52.0.

This will be followed on Friday, 2 September, by the US employment report for August and an unemployment figure. Last time (in July), the US labour market over-performed. This time, the forecast for Non-Farm Payrolls is for 285K new jobs, which would be just over half of the 528K new jobs posted in July. Expectations have come down, and there may be a chance for a positive surprise again. At the same time, there is a risk that a strong labour market could trigger further increases in interest rates.

Hence, it can be challenging to see the stock market turning from Bear to Bull in the short term. Rising interest rates seem to be preventing that. Therefore, we suggest an investment in gold, a classic hedge in times of high inflation. Notably, the gold price performed very strongly in the early 1970s in the context of the oil crisis linked to the Yom Kippur War and the high inflation that followed, which given low GDP growth during the same period, became stagflation.

GOLD Spot (in USD per troy ounce), a daily one-year price chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Technically, the USD 1700 level looks like a floor for the gold price. The rising USD has also depressed the price of USD-denominated commodities (including Gold), all else equal.

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The full name for abbreviations used in the previous text:
EMA 9: 9-day exponential moving average
Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.
MA20: 20-day moving average
MA50: 50-day moving average
MA100: 100-day moving average
MA200: 200-day moving average
MACD: Moving average convergence divergence

Important notice

This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future results.

29/11/2022 04:59:12


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