Gold against neglected risks
On June 10, 2021, the US inflation figures were determined for May 2021. They showed that annual US consumer price inflation was 5 per cent, the highest level in 13 years, up from 4.2 per cent in the previous month. In addition, the 'core consumer price index' rose 3.8 per cent compared to last year, the highest jump in almost three decades. While the inflation figures were higher than expected, financial markets have reacted quite calmly. Or so it seems. US interest rates barely moved; in fact, they fell slightly – which is not what you would expect if and when investors fear a surge in inflation; likewise, the prices of gold and silver went down following the CPI release on June 10.
Perhaps investors had expected even higher inflation so that the data release provided some kind of relief and encouraged them to buy into the bond market? Or investors expect inflation not to be a real problem, that it will turn out to be temporary so that bonds at current prices are a bargain. Or is something else at work? It cannot be dismissed out of hand that the Federal Reserve is intervening and buying bonds to prevent interest rates from rising, as this not only channels new money into the Treasury's coffers but actively depresses market interest rates.
Such a policy is known as "yield curve control". A central bank can put it into practice quite easily, with or without an official announcement. Given its unrestricted buying power, the central bank can signal its intentions to the trading desks of big banks and hedge funds, thereby effectively inducing the market to keep interest rates at the politically desired level. It would not be surprising if the Fed had already unofficially introduced some kind of yield curve control regime. It is certainly not too far-fetched to suggest that the bond market has become something of a 'fake market' if that's the case.
A market in which interest rates no longer reflect the real growth and inflation expectations of market players but are predominantly driven by the expectation of the interest rate the central bank wants to set – an interest rate that does not correspond to economic reality but is set according to the financial needs of the government. That said, we should not be surprised that interest rates have not gone up with the rise in price inflation. And under the current monetary policy, it seems unlikely that interest rates will be increased any time soon.
To be more precise: Interest rates in real – that is, in inflation-adjusted – terms are unlikely to return to positive territory anytime soon. The level of debt – not only in the US, by the way, but also in many other parts of the world – has simply grown too high for the Fed to be in a position to bring real interest rates back up and above the zero line. The Fed may opt for some tapering at some point (thereby allowing long-term yields to rise and the yield curve to steepen somewhat), but it is unlikely that short-term yields will return to 'real' yields again anytime soon.
It is an outlook that does not bode well. Artificially suppressed interest rates, let alone negative real interest rates, cause problems: overconsumption, price misalignments in financial markets, malinvestment, speculative bubbles, overindebtedness, price inflation across the board, you name it. In fact, the current monetary environment – characterised by central banks' chronic money printing and their exceptionally low interest rates policy –is sowing the seeds of the next crisis, whenever it may come, and in whatever form it may present itself.
Holding physical gold is one possibility to counter the unfolding spectrum of risks, or rather, uncertainties. The exchange value of the yellow metal cannot be debased by central banks running the printing presses. Moreover, gold does not carry any counterparty risk; it cannot default. At this point, people might not want to face reality and act accordingly; they may neglect the risks of inflation and payment defaults. This could explain why – from our point of view – the price of gold is still fairly low and offers investors an attractive opportunity to build up, or expand, their gold exposure.
Thorsten Polleit. Chief Economist at Degussa