Investors are pouring money into gold as a hedge against inflation on concerns that stimulus measures will lead to a surge in prices
The Wall Street Journal
Hedge funds are betting that inflation will pick up as central banks and governments world-wide print and spend vast amounts of money to support jobs and businesses hit by the coronavirus pandemic.
That bet goes against the weight of recent history.
Gold, a classic inflation hedge, has surged 14% this year as investors fret that central banks will print a lot of money, debasing its value. Other indicators, such as long-term government bond yields, show no sign of concern.
This, in some ways, is one of the most important trades in markets. Much of the developed world has grown accustomed to lower inflation since the early 1980s, and muted levels over the past decade.
Plenty of investors have worried about inflation leaping since central banks began flooding markets with easy money following the 2008-09 financial crisis. They have been proven wrong. But if this year’s wave of stimulus measures-more aggressive and sweeping in scope-precipitate a sharp increase in the price of goods, financial markets may well be turned inside out.
Persistently high inflation can erode profits for companies that struggle to pass on price increases to customers, and leave consumers with less purchasing power if wages don’t keep pace. That could prove a mixed bag for stocks, and horrific for bonds, which would lose value given their currently low payouts.
Inflation is unpredictable, and plays out in unpredictable ways.
“There’s a whole cauldron of factors that will influence where prices go,” said Jane Foley, head of foreign-exchange strategy at Rabobank. Behind the new coronavirus, there are still trade wars of the last few years to be settled and a push among some politicians to bring more manufacturing home, she said.
Bond markets have shown little concern about inflation for years, and central banks have struggled to generate any. Some indicators suggest there isn’t much worry now about a sudden surge in prices.
The average inflation for the next decade in the U.S., as implied by the gap between yields on the 10-year inflation-linked and 10-year Treasury notes, was 1.19% Friday. In the euro area, the same measure was 0.5%, using a 10-year inflation-linked German bund, according to data from Refinitiv. Inflation expectations in the U.S. swap market, where people hedge their exposure to price changes, was 1.3%. It was 0.7% in the euro area by the same measure.
The gold market suggests something different: Prices began surging in mid-March, when the Federal Reserve launched a string of programs to boost markets and support the economy. The metal is viewed both as a haven asset and what investors call a real asset, something physical that is judged to have intrinsic value in any economy.
Some well-known hedge-fund managers are placing bets on gold because of the perceived inflationary risks. London hedge-fund manager Crispin Odey has been a longstanding critic of monetary easing and is buying gold as a hedge against inflation. New York-based Elliott Management Corp. has also pointed at central banks’ money printing as a reason to buy gold, according to reports.
“All real assets will benefit from higher inflation, but gold is more than just a real asset, it is the monetary asset of choice,” said Diego Parrilla, at Quadriga Asset Managers in Madrid, who manages a fund designed to perform best when most markets tumble. “In the battle of the currencies, gold will win.”
His Quadriga Igneo fund owns gold and Treasury-inflation-protected securities to protect against inflation risks, alongside U.S. Treasurys and options on stocks or other assets. Mr. Parrilla believes inflation will return in the medium to long term because of excessive money being printed by central banks.
“The virus will go, but the liquidity will stay,” he said.
Governments and central banks are getting closer to breaking long-held policy taboos, according to Alberto Gallo, head of macro strategies at fund manager Algebris Investments. He is worried about debt monetization, where central banks essentially finance government spending, and about savers being forced to accept negative real interest rates. These things are inflationary because they debase currencies.
“This is not about very high inflation, but about interest rates being far below inflation,” Mr. Gallo said. “We want to own gold because if rates go negative in the U.S. as well, and you’re paying to hold dollars, you might as well pay to hold gold, which has only a finite supply.”
He is also buying hedges against higher-than-expected longer-dated inflation in the U.S., on concern that supply constraints may push prices higher when demand recovers.
At the moment, most major economies are hurtling toward a sharp contraction in activity, with a spike in unemployment and plunge in spending levels. U.S. consumer prices have dropped by the most since the last recession as restrictions on work and social activity disrupts demand for energy, travel, clothing and services.
Once the lockdown ends and people return to stores, there may be less capacity to meet the revival in demand, with companies failing and business investment collapsing.
Much depends on how and when Covid-19 is controlled, and that makes predicting inflation harder than usual.
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