The haze of the economic recession is pervading, is the negative price of gold exhausted?

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Recently, the most dovish Fed official in a long time, 2023 FOMC voter, Minneapolis Fed President Kashkari said at a town hall event that my colleagues and I will take the necessary steps to bring the economy back into balance .

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Such remarks highlight two points. First, Fed officials are united in the goal of lowering inflation. Recently, Fed Chairman Powell reiterated that interest rates may be raised by 50 basis points in the next two times to continue action to suppress inflation. "Eagle King" Bullard also made remarks on Tuesday in line with Powell's rate hike;

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Second, there is the possibility of an economic recession. Federal Reserve Chairman Powell stated in a previous interview that a soft landing is difficult, and whether it can be achieved may depend on factors beyond the Fed's control.

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This time, the Federal Reserve adopted a strong monetary expansion after the epidemic, and the M2 growth rate was as high as 20%. According to the law of monetarism, such a high monetary growth rate will inevitably bring about inflation. To fight inflation, a key step is to reduce the money supply and control the growth of M1 or M2 within a reasonable range. From this perspective, it seems that the Fed should use "balance sheet reduction" as its main monetary policy tool, because "balance sheet reduction" is a quantitative tool that has a more direct effect on reducing the aggregate money supply.

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The Russia-Ukraine incident has led to global energy and food shortages, rising prices, and the pressure of "stagflation". The difference is that in the 1970s the United States was a net importer of crude oil, but now the United States has become a net exporter and has become more self-sufficient in energy. However, the United States is currently facing other supply shocks such as supply chain bottlenecks and labor shortages, which may be difficult to resolve for quite some time. If these shocks persist, they will also increase the sustainability of inflation.

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Although the price of gold has declined recently, there are still 5 reasons to continue to allocate gold. Bridgewater Fund Dalio reviewed the global economic history of nearly 500 years and believes that the most recent cycle in which gold has global influence is 1930-1945. , and now the global pattern is repeating the scene of the year. In Dalio's view, the following 5 changes are taking place in the global reserve currency system, and these signs are the reasons to hold gold.

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1. Government funds are exhausted

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First, when the "world currency" government funds are exhausted, the amount of money exceeds government revenue, so these governments create a lot of debt and print a lot of money" And, because of the huge wealth and opportunity gap in the United States, there is a potential risk of social conflict .

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Second, changes in the international order

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In 1945, after the end of World War II, a new world order began to be established, and the victor of that war determined the course of events. In 1945, when the US won the war, it was the richest country in the world; it owned 80% of the world's gold, gold was the currency, it owned half the world economy, half the world's GDP, and it had a monopoly.

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Third, stagflation is coming

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Inflation is scary for investors; bonds won't make money, cash is a bad idea, and stock valuations will fall. What is the best way to protect the value of money or wealth?

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The most important thing is not to own debt assets, because these assets will be subject to inflationary pressure. If you're buying an inflation-indexed asset, that's fine. They are inflation-indexed bonds, but do not own assets that will lose their purchase price. For the average investor, Dalio said there are very few options.

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During stagflation, physical gold and other commodities explode, while most other asset classes (especially investment risk) underperform. In other words, if one chooses investments with roughly the same expected returns, but is uncorrelated, and puts them in the same portfolio, one can reduce risk by up to 80%.

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Fourth, beware of the reliability of the Fed

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For now, the Fed needs to keep all options open to aggressively fight inflation. But the Fed is signaling that they think inflation is peaking. There are fears that the Fed may have made a mistake and may have to push the economy into recession faster.

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In fact, the Fed has repeatedly stressed in 2021 that "inflation is temporary" without taking action, waiting to act slowly when inflation is out of control, but at the same time emphasizing a "soft landing"; as inflation continues to remain high, the Fed begins to not guarantee " soft landing". Credit has been overdrawn, and in any case, under the erosion of inflation, gold is a wise choice.

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The appreciation of the U.S. dollar index since the beginning of this year is not the result of the Fed raising interest rates and shrinking its balance sheet. Looking back, between the relatively stable US and the relatively damaged non-US, there must be a huge relative change to reverse the strong dollar.

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For example, the constraints of the Russian-Ukrainian conflict on Europe, and the end of the impact of the Chinese epidemic on the economies of China and Japan, the US has turned stronger to suppress the US dollar; or the economic risks of the three major economies of China, Europe and Japan have spilled over, bringing down the US economy. Accelerate its slowdown or even recession.

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The fundamentals of the U.S. economy are likely to show signs of obvious deterioration in Q3, and even the unemployment rate is very likely to start to pick up in August-October. In addition, when the U.S. inflation center will drop significantly (for example, from the current 8.3% to 4-5%), the Fed is expected to "consider" ending interest rate hikes at that time. The Chinese economy will also usher in a rebound in Q3. Under the resonance, the US dollar index may peak at that time, and this is also very likely to be the end of this round of US dollar appreciation cycle, and then enter a depreciation cycle.

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However, it is worth noting that the Federal Reserve officially began to shrink its balance sheet in June. Under the continuous tightening of liquidity, global equity assets and market risk appetite may usher in the last test. At that time, the US dollar may also have the last rush.