During the first half of 2021, getting impressive investment results was only slightly more challenging than shooting fish in a barrel. Global stocks and commodities enjoyed their fifth best six-month rolling performance in a century, with oil the best performer (up 51.4%). By contrast, 10-year US Treasuries fell 24% in the first quarter, marking their worst quarter on record.
The “reflation” operations were rewarded, but the traditional inflation hedges were not. Gold fell 6.5% in the first half as investors, especially in the US, abandoned their holdings of precious metals. US gold-backed ETFs posted $ 8.5 billion worth of outflows. However, since then, the investment context has become more nuanced. Asset allocation in H2 could prove more difficult.
Fiscal policy factors in
The reflation narrative reflected the success of the COVID-19 vaccine launch, along with monetary and fiscal largesse. This combination led strategists to predict a V-shaped recovery when the global economy hit the reset button. Inflation impressions were higher than the central bank’s targets, but 72% of investors in the June Bank of America Global Fund Manager survey believed repeated assurances from policymakers that this inflation was “transitory.” .
In both June and July, the US CPI registered increases of 5.4%. In the euro area, the PPI rose a record 10.2% year-on-year. Monetarists would say that we are now seeing the lagged effects of an unprecedented stimulus. In April 2020 alone, US M3 (aka broad money) rose 7.3%, a higher figure than any full year during the previous decade. S&P reports that public spending has increased by the equivalent of 13% of world GDP.
Fiscal policy has become an important driver of aggregate demand. President Biden’s $ 1.4 trillion infrastructure spending and the $ 1 trillion European Union Green Deal are two examples. These initiatives require manpower. But just as inflation has been dismissed as transitory, the rigidity of labor markets in the US and UK is seen as short-term and frictional.
The role of work
However, labor has an increasingly strong political voice. Supply chain bottlenecks in the wake of COVID-19 also suggest that the inexorable increase in offshoring and globalization will slow down. The Phillips curve, which measures the relationship between prices, wages, and output, fell into disuse in the 2000s. But workers’ compensation as a percentage of US GDP has started to rise.
HAS THE “DEATH” OF THE PHILLIPS CURVE BEEN VERY EXAGGERATED?
Source: Federal Reserve Bank of St. Louis
If policymakers get it wrong and inflation stiffens, gold is likely to move up the asset allocation agenda for the remainder of 2021. The opportunity cost of owning (zero-yielding) gold vs. 10-year US Treasuries have only been lower in recent years. decade at the height of the COVID-19 pandemic between February 2020 and 2021.
In August 2020, the price of gold rose to new records, above $ 2,000 an ounce. Globally, a quarter of all bonds still have a negative yield (German 30-year bonds) and only a third have a yield of more than 1%. India was eclipsed by Germany as the second-largest retail gold market in the first half, but Indian investors are making a comeback as COVID-19 slowly declines. Current active cases are at their lowest level since March 2020.
The latest CFTC Traders Commitments report shows that short positions in gold (and silver) are being reduced. The improvement in sentiment and the change in positioning are likely to provide short-term support for gold.
Supply and demand at an inflection point
Between 2001 and 2011, the price of gold increased from $ 225 an ounce to $ 1906 an ounce. This was accompanied by a record of mergers and acquisitions ($ 38 billion in 2011) and a capex binge. Since then, capex has fallen 70%. Gold exploration budgets reached $ 10.8 billion in 2012, but gold discoveries (206 million ounces) peaked six years earlier. As of 2006, there are only a handful of new mines with potential reserves in excess of 6 million oz. that have come into operation.
Cost cutting has forced miners to focus on abandoned land and existing reserves are rapidly depleting. The Witwatersrand Basin in South Africa has produced approximately 40% of all gold mined, but current production is about one-tenth of its peak in the 1970s. Reserves in many of the world’s largest mines (Mponeng in South Africa, Carlin Trend in the US and Super Pit in Australia) are declining.
Mark Bristow, CEO of Barrick Gold, the second-largest miner, said in August that “the chronic tendency of the gold mining industry to reap the price of gold rather than invest in the future has led to a decline in reserves and a shortage of high-quality development projects. “
Perhaps the biggest support of all for gold probably comes from central banks. At the turn of the century, the US dollar made up 73% of reserves in the IMF’s COFER database. That has dropped to less than 60%. The share of the Chinese renminbi and the euro has grown modestly, but gold’s strong capital preservation characteristics allow reserve managers to sell their dollars while they wait to see if a true competitor to the US dollar will emerge from the challenging package.
The Bank of Thailand bought 90 tons of gold in April and May, increasing its holdings by 60%. Central banks in Brazil and Hungary have also been active, with Russia increasing its gold holdings in July for the first time since June 2020. Almost 80% of reserve managers plan to increase their gold holdings over the next year, according to a poll. by the World Gold Council.
This long-term support for gold prices from central bank buyers could provide a floor above $ 1,700, given that new supply is highly restricted. If inflation remains stagnant above policy targets, asset allocators will be forced to reconsider the traditional role of gold as a hedge. That would help gold regain its luster and could drive prices up.
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