Wall Street sentiment fell victim to so-called “kamunism” after Democratic candidate Kamala Harris unveiled her plan, which includes a 28% corporate tax, price controls, a 44.6% capital gains tax and, last but not least, a tax on unrealized profits. From early on the actions small caps They were the first martyrs and on par with the “most shorted” stocks. This came as growth data surprisingly fell back to multi-year lows and the Philadelphia Fed survey showed a decline, modestly raising rate cut expectations. The same was true for the dollar and US Treasury bond yields. Oil fell, as did bitcoin. However, Gold set another record, exceeding US$2,550 per troy ounce, and has already risen more than US$500 this year.
At the opening of trading, Deutsche Bank strategists warned clients that the catalysts behind the pullback had not necessarily evaporated, explaining that there were five key risks that remain and that investors should be aware of.
First of all, Stock valuations remain at historic highs and the market is trading in moderate overweight territory that worries some on Wall Street; secondly, Economic data remains vulnerable; thirdly, Monetary policy is becoming increasingly restrictive in real terms (the fed funds at the highest level since 2007); in fourth place, September has been a seasonally bad month for stocks in recent years (S&P 500 has fallen for four consecutive years and in seven of the last ten and global fixed income has fallen for the last seven Septembers); and in fifth place, Geopolitical tensions remain high. However, Gold continues its bullish streak.
Gold: What are the drivers of the metal?
For many London metals market experts, the price of gold has been driven by Western investors, through purchases of gold ETF funds.and the more favourable financial environment for the precious metal. On the one hand, they recall that the upward trend in gold prices dates back to 2022, driven by sustained demand for jewellery; investment in physical gold (coins and bullion) by Asian investors; and massive purchases by central banks in emerging countries, and China in particular, which wish to diversify their foreign exchange reserves and thus reduce their exposure to the dollar. But these factors are now These include changes in geopolitical and fiscal trends that pave the way for sustained demand for gold in the face of a downward trend in the dollar and real interest rates.
The fall of the Berlin Wall, globalisation, US hegemony and low debt levels led Western central banks to sell as much gold as possible between 1989 and 2007, because after 1999 they were limited by gold agreements to maintain order in sales. Thus, the demonetisation of gold as a reserve asset seemed logical. After the 2008 financial crisis, expansionary monetary policies and incipient geopolitical tensions were enough to curb Western sales and quietly attract emerging market central banks to the gold market, up to an average of 400 tonnes per year between 2009 and 2021. But Between 2022 and 2023, they purchased more than 1,000 tons of gold, 20% of global demand, a pace that continued in the first quarter of 2024. Experts warn that the gold market is not big enough to absorb such a sustained move without driving prices up significantly, especially if other global players also try to enter at around the same time.
Is it time to take profits?
It is worth remembering that weeks ago A World Gold Council survey found that 29% of the 70 central banks surveyed intended to increase their gold reserves in the next 12 months, and 81% expected a further increase in monetary bodies’ gold holdings. However, given the current price levels, investors exposed to gold might be wondering whether it is not time to sell and make a nice profit. In this regard, the people at Flossbach von Storch believe that: Gold should continue to have a notable presence in investors’ portfolios, Since in recent decades, virtually all crises have been fought with more money, and this is unlikely to change in the future.
Moreover, the next crisis could hit the euro again if budget deficits continue to spiral out of control and exacerbate tensions in the eurozone. While US public debt exceeds 120% of GDP and none of the presidential candidates is known for their strict budget discipline, There are good reasons to continue devaluing paper currencies against gold. In fact, they point out, gold has always played a diversifying role, as it has an inverse correlation with other financial assets, meaning that, at least in theory, gold can improve the risk/return profile of a financial allocation in the medium and long term. In summary, they conclude that profit-taking is justified, but that there should be some room for gold in every portfolio.
Expert Doug Casey, in addition to all the consensus arguments (prudential demand, high debt, uncontrolled issuance, central bank buying), explains that historically, gold has been negatively correlated with real interest rates: when real rates rise, gold prices tend to fall, and vice versa, because high real rates can make US Treasuries more attractive to some investors than gold. However, Despite a substantial increase in real interest rates since 2021, gold prices have reached new all-time highs.
What’s going on here?: While nominal rates have risen from almost nothing in 2021 to current levels around 5%, real rates are still negative, and despite suspicions about official consumer price indices, prices can be relied upon to rise much further, as the government has a $2 trillion deficit and the Fed finances it by buying its debt (essentially, printing money), on top of that, as the economy slows, deficits will increase a lot, as will the rate of currency devaluation. Since rates correlate with long-term inflation because no one wants to lend money at a price below the inflation rate, what happens is that people do not have many alternatives, they choose to hold cash or speculate on stocks, bonds or real estate. Faced with the risk of continuing to feed a supposed financial bubble, gold thus appears as a refuge from the projected scenarios.
Source: Ambito
