Global markets are showing mixed signals as gold prices surge to record highs, fuelled by concerns of stagflation and eroding confidence in central bank independence. On Wednesday evening, weaker-than-expected US job openings data boosted the probability of a Federal Reserve rate cut, triggering a relief rally across asset classes. However, the spot price of gold jumped 1.1 per cent to $US3570.73, signalling deeper anxieties about the economic outlook.
The surge in gold prices reflects fears that any rate cuts will coincide with rising inflation, creating a favourable environment for bullion. Nick Ferres, chief investment officer at Vantage Point Asset Management, notes that gold thrives when the Federal Reserve is inflationary and accommodating irresponsibly loose fiscal policy. The Federal Reserve’s Beige Book also highlighted rising prices, slowing growth, and weaker labour markets, reinforcing stagflationary concerns.
Adding to the unease is the perception that the Trump administration is attempting to influence the Fed through public pressure and appointments. Macquarie strategist Viktor Shvets believes the Fed’s independence is impaired, which could embed higher inflation. Goldman Sachs has advised clients to diversify into commodities, particularly gold, citing threats to American institutions and increasing supply concentration.
Goldman Sachs analysts suggest that if Fed independence is compromised, it could lead to higher inflation, lower bond and stock prices, and a decline in the US dollar’s reserve currency status. They foresee potential upside for gold prices, potentially exceeding $US4500 an ounce, indicating a further 26 per cent increase. While gold investors are celebrating, broader financial markets should remain cautious amid these turbulent economic conditions.
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