Gold and silver will outperform as 'stagflation light' sets in - Saxo Bank
NEW YORK (August 28) The U.S. economy is set to enter a period of very low growth combined with persistent inflation, and this means precious metals like gold and silver are likely to see significant prices increases, according to Ole Hansen, Head of Commodity Strategy at Saxo Bank.
Saxo Bank recently adjusted their U.S. economic outlook for 2024 to what they refer to as ‘stagflation light’, characterized by “sluggish growth paired with persistent inflation.” Hansen said that the massive rise in real interest rates has made “the funding costs for the US almost insurmountably high,” and contributed to the downgrade of U.S. credit by Fitch.
Hansen also points out the “significant escalation in consumption costs with interest rates” affecting credit cards, new cars, and mortgages, and “a noticeable deceleration in job data and spending.”
“This combination of low growth and moderately high inflation is indicative of stagflation, and if materialized it will confirm a view that the Federal Reserve and central banks around the world in general are fighting a losing battle against stubbornly high inflation and that further action will damage economic growth while doing nothing to tame the sticky nature of prices pressure,” he said. “It leads us to believe that the US Federal Reserve will cut rates before the 2% average inflation target has been reached, leading the FOMC to upgrade its target to 3%, a development that will force a repricing of future inflation expectations, and with that a commodity supportive lowering of real yields.”
Hansen said that in periods of stagflation, “specific commodities attract heightened attention” as inflation hedges and for portfolio diversification.
He added that “a weaker dollar can make dollar-denominated commodities more affordable for non-dollar-based buyers, potentially amplifying demand and prices,” and they are also attractive because they can deliver positive real returns even as inflation saps the returns from traditional investments.
“This is particularly pronounced when commodity prices surge due to supply limitations or strong demand,” Hansen said.
“An ample supplied market would in normal circumstances always trade in contango as a higher forward price reflect the cost of storage, transportation, and not least funding costs,” he said. “The chart below shows the spread between the first and the 12th month futures contracts across the major energy and metal futures. The yellow line stands for the one-year funding cost inverted, currently around 5.3%, and those commodities that trades above are experiencing some degree of tightness, something that is important to understand as it may support prices despite a weakening economic outlook, while also providing an added return to investors.”
Hansen said that certain commodities, “and especially precious metals like gold and silver, might gain an edge during a period of stagflation,” while those driven primarily by consumer demand such as agricultural products will likely see weaker performance.
“The same could be said about industrial metals, but high funding, employment and environmental costs as well as continued demand for green transformation metals could still add some of these metals to the group of commodities potentially benefitting from stagflation,” he added. “Therefore, investors who want to invest in commodities during stagflation should in our opinion be selective and diversify their portfolio across different sectors and regions.”
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