As gold rises to new record highs and the bond markets shift, Daniel Antoniou, the Executive Director of 7Q Financial Services Ltd to shared his expert view on global financial developments with CBN.
Antoniou, among other things, talked about the importance of analyzing Central Bank policies, particularly those of the US Federal Reserve as it is about to embark on a series of interest rate cuts. He also discusses how fiat currencies are being eroded by inflation and how gold is the main beneficiary of investors fearing that fiat currencies are increasingly losing their purchasing power. In addition, Antoniou suggests how bond markets are also being influenced by these dynamics.
“When assessing the recent moves in gold and the bond markets, it is important to analyse the recent evolution of Central Bank policies, and especially those of the US Federal Reserve,” Antoniou said, going on to explain, “Unlike the European Central Bank that follows a singular, inflation targeting mandate, the US FED upholds a dual mandate; as well as maintaining price stability, the US FED also wants to pursue policies that maximize employment.”
As Antoniou noted, “In recent weeks, US FED officials have been signalling an increased tolerance towards observed inflation rates (currently in the US at 2.9% vs official target of 2.0%), instead opting to focus on supporting the weakening labour market.”
“In simple words,” he explained, “the world’s most influential Central Bank is set to embark on a series of interest rate cuts, even though inflation remains much higher than the official target.”
‘Institutionalisation’ alarm bells
“In recent years, various market commentators have been sounding the alarm bells for what they see as an ‘institutionalisation’ of loose monetary conditions,” Antoniou continued, going on to note, “As one example, we can mention populist governments around the world which spend beyond their reach to appease to their voters, leading to increased levels of national debt, and as a result needing – and pushing for - low interest rates for the debt to remain manageable.”
“Another example,” the expert says, “is that since the GFC of 2008, financial markets have been primed to expect Central Banks to save the day. Indeed, Central Bankers are quick to cut rates or inject emergency liquidity or both, whenever signs of deterioration in economic conditions are emerging, even in the face of persistent inflationary pressures.”
Currency debasement gaining prominence
Also, according to Antoniou, “Currency debasement has been a fringe theme for some years now, but it seems to be gaining prominence lately, as the above-mentioned examples become more and more established.”
He goes on to note that, “Fiat currencies are being eroded by inflation, and the overall trust in governments is becoming weaker, particularly among younger generations. Gold has been the main beneficiary of this theme, as it is scarce and has internal value, unlike fiat currencies. In recent years, Bitcoin has also rose in popularity as an inflationary hedge, as its supply is also limited.”
“So, the equation is simple; as long as investors fear that fiat currencies are increasingly losing their purchasing power, they will be bidding for scarce, hard assets, driving their value higher,” Antoniou suggests.
He goes on to note that, “Gold is a main beneficiary of this theme. We can also mention Central banks buying gold, as countries look to diversify away from US Treasury Bonds (and the ballooning US debt).”
Steepening of the Yield Curve
The expert, in addition, points out that, “Bond markets are also influenced by such dynamics. Central Banks opt for lower short-term interest rates while tolerating long-term inflation. This tends to create the so-called Steepening of the Yield Curve.”
“What this means,” Antoniou explains, “is that short term interest rates are kept low whereas long term rates increase the further out we go in time, i.e. a curve that starts low and gradually increases.”
“It all leads back to cash which cannot earn sufficient real yields (nominal yields minus inflation) to retain their purchasing power, further fanning demand for inflation hedged assets,” the expert concludes.
