“Investors [are] united in the belief of eternal repression of interest rates and, more recently, debasement of the US dollar”, BofA’s Michael Hartnett writes, in the latest edition of his popular “Flow Show” series.
Spot gold hit $1,900 for the first time since 2011 on Friday morning.
Deeply negative real rates have pushed the dollar lower and eliminated the opportunity cost of holding the shiny metal, which has witnessed a veritable flood of inflows this year. Precious metals enjoyed their second largest haul ever last week, BofA says.
In addition to the appeal associated with the debasement narrative, gold is also presumably benefiting from haven demand tied to signs that the global recovery may not be as robust as optimists hope.
Throw in incessant escalations in Sino-US tensions, and it’s not difficult to understand why investors are so enamored.
On Friday, nominal five-year US yields hit record lows. “When interest rates are zero or near zero, then gold is an attractive medium to have because you don’t have to worry about not getting interest on your gold and you see the price will rise as uncertainty in the markets are rising”, Mark Mobius told Bloomberg TV, in an interview.
Gold is gunning for a seventh straight weekly gain, another “since 2011” moment. On the year, it’s battling tech for the crown, gaining the upper-hand this week, when the Nasdaq 100 lost its luster amid a cacophony of bubble calls.
BofA’s Hartnett speaks of a “Great Debasement” in his latest.
“Interest rate repression means investors can’t hedge the inflationary risk of $11 trillion of fiscal stimulus via ‘short bonds’, so [they] crowd into ‘short US dollar’, ‘long gold’ hedges”, he writes.
And yet, at the end of the day, beware speculative moves in “assets” with no underlying rate of return.
“What all of this achieves is drumming up excitement around a mania-prone Veblen good”, Bloomberg’s Eddie van der Walt said Friday, in an amusing little bit.
“Soon, dentists and other retail investors will be getting in on the action”, he added. “That makes the rally self-perpetuating… Right until the moment it stops”.