Is This The Turning Point? Time to Get “Real Assets”?

Friday night saw a bloodbath on Wall St with everything dropping as the market got spooked that a US rate rise was back on the table for September.  US shares saw their worst week in 7 months and the biggest single drop since June.  Gold and silver weren’t spared though gold was down only 1% compared to shares falling around 2.5% and bond yields surging globally as bonds too were dumped.  The USD shot up, putting the AUD down and buffering us from some of the losses.  

In a dramatic end to one of the longest spells of non volatility the VIX (volatility index) went from a 45 year low to its highest since Brexit.  This is classic market behaviour.

So what happened?  Well firstly it was a market already wary of bond price movements after the ECB surprised by not easing further, and the Bank of Japan speculated to be reconsidering its easy money as well.  The dovish Fed member Rosengren then appeared hawkish (talking up a rate rise) and that really spooked everyone.  There was also a press release that fellow dovish member Brainard would talk tonight our time.  It has all the appearances of another Rosengren moment which continued the bond sell-off along with shares and PMs.  Tonight should definitely be interesting one way or another.

It’s incredible how quickly a market can turn.  On the poor NFP numbers the September hike was off the table and the usual stimulus talk abounded.  Now (intriguingly just after the G20…) central banks appear to be changing their tune.  It almost looks like they have agreed all this monetary stimulus - zero and negative interest rates combined with QE money printing - just isn’t working.  That then leads to possibly fiscal stimulus (big government spending on infrastructure etc) being tried to kick start the still relatively stalled global economy post GFC.  That then gets people talking about this being the bottom of interest rates and possibly inflationary forces coming to bear.  The Fed may well raise rates in September to show that it can and is serious.  The theory may be that moving stimulus from Wall St to Main St will be more effective in generating inflation and the Fed has hinted recently they are likely to accept higher inflation than previously targeted.

That latter point is why more are seeing this dip as the time to buy gold.  Gold LOVES inflation, especially when rates are likely to stay low for some considerable time.  That gives you negative real rates and that is an environment where gold thrives.  Even the sceptics are changing their tune.  Vocal anti gold bug and ex chief investment strategist for Merrill Lynch, Richard Bernstein, explained why he is now a buyer of gold:

"You buy real assets when inflation expectations are starting to go up"