Tuesday, September 27, 2016

Gold Can Get Hit By Inflation (Initially)

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*Gold is at a crossroad.
*Gold benefited from record easing but that may be peaking.
*Such a record easing is bound to drive inflation. The question is will gold benefit from that or not.
*Our bias is that reversing the record central bank easing will initially be the bigger driver lower to gold.

Gold is up about 25% year to date. It's seen a big move and has attracted a lot of new investors. Among the main reasons for its performance was the record easing by central banks. Investor perception is that central bank easing is peaking, as we've written. Because of that if we were to see inflation, we think gold could actually correct which is counterintuitive. We think that because central banks would need to pull the plug on easing and reverse course which can stall one of gold's key fundamental drivers.
Let's look at a chart
We see a downtrend forming.
Source: Interactive Brokers
We see a downtrend forming in gold. We think the main reason is that its key driver, central bank easing, is perceived to be peaking.
Rates Versus Gold
We've shown the following chart before. It shows that the big jump in gold happened simultaneously along with central bank easing.

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