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Goldbug: Near-term volatility, but longer-term upside
Gold prices fell below USD 4000/troy ounce in the past few weeks as both pillars of fiscal dominance – higher fiscal spending and lower interest rates – appeared to take a hit. The apparent end of the West Asia conflict pushed back on front-ended spending, while the Fed was seen as hawkish. We also note the drop in prices in response to increases in TIPS yields with increasing paper supply. However, global fiscal and defence trends appear firmly to be in place, and we do not see the Fed as having been hawkish. There will likely be more near-term volatility, but expecting gold prices to gradually grind higher.
Gold tests USD 4000/troy ounce on geopolitics and Fed, but recovers
Gold prices came lower through the month of June, first on geopolitical developments involving West Asia as well as on stronger numbers for US labour markets, as well as with limited Asian demand seen. However, optimism around a US/Iran MOU in the third week brought prices to find support, before a hawkishly received FOMC pushed prices back down. Hawkish Fed expectations saw gold fall briefly below USD 4000/troy ounce, before recovering as Fed chair Warsh pushed back on hawkish expectations, as well as on softer US payrolls. Latest moves see some weakening with resumption of West Asia hostilities.
Fiscal dominance is not dead, though not immediately apparent
The fiscal dominance and currency debasement study driving gold prices appears to have taken a knock on two counts – the effective end of the Iran war allows for fiscal spending to be smoothened, while the FOMC was seen as hawkish, pushing back on keeping rates lower than they should be for effective inflation targeting. However, there does not appear to be any political consensus for fiscal consolidation in the US while global defence spending is unlikely to halt. Simultaneously, our reading of the Fed is one still open to keeping rates low – potentially through a long hold even when hikes might be called for. These indicate that the fiscal dominance story – like in the 1970s – remains alive.
Expecting a slow crawl higher in gold prices as trends crystallise
We therefore continue to expect further moves higher in gold prices, though with a somewhat slower timeline as fundamentals around money supply and fiscal dominance play out. This has shifted from a short-term momentum-driven process to something more long term, with explicit evidence of fiscal dominance being institutionalised and driven as an active choice, seen in higher than usual inflation and increase in money supply. However, this does not preclude near-term volatility in prices, with a repeat test of USD 4000/troy ounce also possible with a potential resumption of the West Asia conflict.
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