Every now and then, there’s an event that leaves investors shaking their heads and lamenting, “Why didn’t I buy gold?”
Well, the latest occurrence took place last Friday.
As headlines flooded in that Russia is about to take over Ukraine, gold exploded 2% in a matter of minutes.
That’s because geopolitical risk is good for gold prices.
But right now, geopolitical risk is just a convenient backdrop…
What’s more important is the macroeconomic backdrop.
Gold and War-Related Headlines
This isn’t the first time that gold took off on war-related headlines.
Take a look at gold prices in 2014 when Russia annexed Crimea…
The initial reaction sent gold up 15%, only to end down 1.4% for the year.
Or take the first Gulf War from August 2, 1990 to February 28, 1991…
We see the same initial spike followed by gold ending the year down.
These war-time headlines merely produced a blip in an otherwise long-term downtrend.
Deflation Versus Inflation
The market in 2014 was largely a deflationary period, with commodities only at the very beginning of their decade-long bear market.
Looking back, it’s almost funny how the Fed was trying it’s hardest to manufacture inflation any way it could at the time. Meaning, deflationary periods are like a wet cloth to fire – stifling growth.
Now the economic backdrop is completely different.
If possible, the Fed would trade 2014’s deflation with 2022’s inflation in a heartbeat.
Commodities continue to not just outperform equities, but they’re outperforming in a way that could be recessionary – meaning too much.
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The economy can only handle so much inflation before it starts to bite into growth.
Furthermore, the old adage, “Gold falls when interest rates rise” has a lot of folks in macro trading circles scratching their heads.
Because as I stated before, gold and rates have been moving up together this year and will continue to do so.
Right now, the bigger picture for gold is centered around inflation.
And it’s the type that could cause currency debasement if things get further out of control.
If that happens, then those sitting on the sidelines will really be shaking their heads and lamenting a multi-generational opportunity that has passed them by.
So, this war-related price reaction won’t be just a blip… it’ll help accelerate gold prices higher.
They were going up with or without Russia. It could be that Friday’s news was just a wake-up call to investors.
Gold has been lagging – or more accurately lurking – behind other commodities during this rally that we predicted would happen last February.
I suspect gold is ready to take center stage.
So, look for any pullback from last Friday’s gains as an invite to buy more.
After all, this economic backdrop is the only trend that matters and (as always) headlines are just a convenient excuse.
Regards,
Eric Shamilov
Analyst, Market Minute
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