By Diego Parrilla
Gold prices have rallied more than 30 per cent since the lift-off in US interest rates in December. A sharp reversal in pricing, sentiment and positioning driven by a myriad macro and micro factors has left the gold bears and bulls as polarised as ever.
The bearish camp, which has featured prominent and respected analysts like Goldman Sachs, tends to have a constructive view on the US dollar, the ability to raise interest rates, normalise global monetary policy, and generally a benign view on the global economy and inflationary risks.
The bullish camp, which I subscribe to, tends to have a more pessimistic view on the global economy and the unintended consequences of monetary policy without limits, and sees the recent price action as the beginning of a multiyear bull run in gold.
My view that there is a perfect storm for gold is based on three closely interrelated dynamics, whereby central banks and global markets are both testing the limits of monetary policy and credit markets as well as the boundaries of fiat currencies.
Firstly, the limits of monetary policy: in response to the Lehman crisis and in order to combat the threat of deflation, central banks have deployed a wide range of unconventional monetary policies. Quantitative easing and negative interest rates have been game changers and have dramatically distorted the valuation of government bonds, breaking the theoretical ceiling in prices, squeezing shorts and underweight positions, and feeding what, in my view, is one of the largest financial bubbles in history.
The epicentre of the problem is the central banks, but investors and savers around the world, faced with extraordinarily low and even negative yields in their cash and fixed income, have been incentivised — if not forced — to increase the duration in their portfolios, increasing the risk of capital losses, liquidity and volatility beyond what they may be intending or able to tolerate.