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Market mechanisms for gold suspended

Luxembourg, 09 September 2021 – The global economy is growing, even if momentum is somewhat slowing down. But now, it’s asset price inflation that is reaching the real economy with inflation rates rising rapidly. “It’s not gold that is benefitting as a safe haven, though”, said Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. “The familiar market mechanisms for gold are currently suspended.” Overall, therefore, a situation that requires asset management strategies.

“Looking at all three major economic blocs, we can see that they are all growing at more or less the same level in 2022”, Gerlinger pointed out. “Europe is catching up to the US and China.” Overall, the global economy is proceeding at a very high level, even if the peak has probably been passed. All the while, only a few reorientation steps are likely expected, such as the start of tapering in the US. “In Europe, no turnaround in monetary policy is in sight yet, and fiscal policy also remains expansionary on both sides of the Atlantic”, according to Gerlinger.

This is accompanied by a very significant rise in inflation rates recently. “We are currently experiencing a transition from asset price inflation to real economy inflation”, Gerlinger said. “So far, the almost unlimited availability of capital had mainly driven up asset prices.” Now, however, this effect is increasingly arriving at the levels of producer and consumer prices. Once again, Europe is lagging somewhat: “In the course of the year, we forecast inflation rates in Europe to rise to over four per cent; in the US, on the other hand, we do not expect any further increases, but rather a slight decline from the peak”, Gerlinger added.

Normally, expectations of higher inflation should drive demand for gold. “That has pretty much failed to materialise this time, however, at least in terms of prices”, Gerlinger explained. “In fact, more gold has been bought, but that hasn’t moved the price.” The precious metal has also recovered from the recent flash crash. “The regularly observed market mechanism of higher inflation expectations and falling yields leading to a rise in the price of gold did not happen this time”, Gerlinger remarked. Actually, the price of an ounce of gold should be at $2,000 rather than $1,800. “Apparently, market participants are joining the opinion of central banks that price increases will soon be significantly lower again”, Gerlinger said. “All of this even though central bankers have been considerably off the mark with their expectations recently.”

“Some investors consider the new gold to be cryptocurrencies and prefer to resort to them as a hedge against inflation”, Gerlinger highlighted. In any event, the fear remains that, after all, the market will react as the market always does: Rising yields and decreasing inflation might push the price of gold down. For investors, this means a significant increase in uncertainty. “Relying on individual stocks or just a few products is becoming increasingly risky under these circumstances”, Gerlinger cautioned. “In this situation, asset-managed solutions are the way to go.”

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