Faced With Inflation and the Risk of Recession, Gold Is Bound To Sparkle in the Coming Months.
And this will also apply to Bitcoin.
We have witnessed an accumulation of deficits and debts unprecedented in history over the last two years. To this, we must add a war, the consequences of which, whether human, social or economic, are probably only in their early stages. Only the dazzled or the utopian could believe that this could not have a much more severe and profound impact on global economic activity.
Many indicators remind us of this.
The US yield curve continues to flatten (the gap between short-term and long-term rates has narrowed dramatically) and is a leading indicator of recession par excellence. The rise in the price of oil per barrel and the rise in the yield on US corporate debt send the same message: that of a strong probability of stagflation or even recession.
In America, the specter of the severe stagflation of the 1970s is beginning to surface.
Anecdotes of American consumers who are beginning to balk at paying the posted prices are becoming more and more numerous, forcing companies to lower their sales prices. Should we therefore already expect a decline in company sales in the second half of 2022?
The U.S. economic growth forecast issued by the Federal Bank of Atlanta now calls for a rate of 1.25% for the first quarter of 2022. The last time the spread between the U.S. 10-year yield and the S&P 500 dividend yield exceeded 100 basis points (i.e., one percentage point) was in 2018. Nominal rates and equity markets had fallen by then. Now, we hit that threshold again on March 22, 2022.
As a reminder, Powell's pivotal level at the end of 2018 (when he stopped raising federal rates) was 2.5%. Jerome Powell now wants to take these federal rates to 2.8% in 2023 (according to the Federal Open Market Committee projections of March 2022). Either the President of the US Federal Bank will succeed because inflation will get worse, or he will not succeed because the economic aggregates will rebel by succumbing to this more restrictive monetary (and fiscal) policy.
In both cases, gold will benefit because negative real rates are here to stay. The good performance of gold and gold mines (in the stock market) since the fall of 2021 validates this scenario without any ambiguity. Beyond gold, this will also strongly benefit Bitcoin, which is increasingly seen as a better hedge against inflation than gold.
All this will have to be confirmed in the coming months, and it will be interesting to see if the decorrelation between Bitcoin and the S&P 500 becomes a consequence of the global economic situation.
Some reading
Birth of a Bretton Woods III – The Fall of the American Dollar King, the Emergence of Outside Money. With Bitcoin as the future king?
Here’s Why Bitcoin Will Be King in Hard Times, Just As Gold Has Been in Centuries Past. Money with none's liability will always be king in hard times. And so will Bitcoin.
The End of the Petrodollar Era – China and Saudi Arabia Want To Replace the King Dollar With the Yuan. A new world monetary order is emerging.