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The balance goldilocks economy4/8/2023 ![]() When inflation leads to a skyrocketing cost of energy, countries pay attention. Some countries are mass producers of energy, while others rely on importing it to keep their economy afloat. Every country has a vested interest in it's cost and accessibility. Energy policy has a huge effect on foreign policy.Įnergy is a valuable resource. The Bank of Canada will spend the next few years hiking interest rates at a steady clip to see where the proper balance is of fighting inflation fears vs. Consumers were so tight for cash during COVID though, and many of them still are, that this was not a possibility last year. When interest rates increase, the impact that has on an economy isn't realized for 12 - 18 months. Will this rate hike solve our inflation problems? Probably not. Here is what you can take away from this episode:ġ. How does this impact inflation? How does it impact the Canadian people? Have a listen to the episode to find out! On Wednesday, the Bank of Canada increased the overnight rate from 0.25% to 0.50%, the first rate increase since 2018. A return of risk appetite or improvements in other asset classes could result in an unwinding of investment buying and put considerable downward pressure on the gold price, particularly if global economic and financial conditions begin to show meaningful signs of improvement.This week's episode is all about how the economy maintains good order and balance. ![]() We would expect gold prices to be heavily influenced by any signs that the US toxic debt plans would result in improving economic or financial conditions. At over 1.4 million tonnes, ETF holdings are close to half the world's annual mine supply. § Gold is a crowded trade at present, with a prevalence of gold bulls evidenced by record levels of ETF holdings and physical buying. Real yields could once again be obtained in cash and bonds and equities could begin discounting economic growth. § This 'Goldilocks' economy would completely remove the safe-haven investment case for gold as a form of insurance against inflation or as an alternative currency. Inflation would be averted, and economic growth could continue. Furthermore, under this scenario all other central banks will do the same. Under the Goldilocks scenario the Fed's balance sheet will quickly adapt once economic activity begins to improve as the Fed reduces the money supply dramatically and curbs any major inflationary cycle. A Goldilocks economy is neither too hot nor too cold, sustaining moderate economic growth and low inflation, allowing for market-friendly monetary policy. § We believe the primary bear risk to gold is the 'Goldilocks' scenario. ![]() However should investment flows into gold cease or turn negative, we believe that this drying up of investor demand will have repercussions for the gold price. Gold's safe haven status in times of economic turmoil drove identifiable investment demand up by 182% year-on-year in the fourth quarter of 2008. We believe that investment demand is the primary price-setting segment of the gold market at the moment. § The gold price is being driven primarily by investment demand. Given the current consensus support for gold, what is the bear case for gold which is preventing the price from rising even more dramatically and what are the factors that could exert downward pressure on gold? § But why has gold not moved past its 2008 highs? Gold has made significant gains and gold equities have outperformed in recent months, however it has yet to move past its 2008 highs despite the preponderance of economic news which should be bullish for the gold price. Quantitative easing programmes are also supportive for gold. This supports our positive outlook for the commodity and for gold equities. § We remain bullish on gold, continuing to believe that gold can perform well in either an inflationary or deflationary environment. In this note, given that we believe gold is a crowded trade at present, we examine the bear case for gold. However, we believe it is also important to evaluate the factors which could exert downward pressure on gold. Last month we stated the bull case for gold, and on balance we remain bullish ourselves.
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