Do Rising Gold Prices Suggest Resurgent Inflation? | Lord Abbett
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Economic Insights

Investor assumptions that rising debt levels may spark a sharp rise in inflation may be off base. Here’s why.

Read time: 2 minutes

Following the global financial crisis (GFC) of 2008–09 and during the Euro crisis of the early 2010s, investors made a bet on gold as a hedge against rising inflation and systemic risk. As the risk of European currency disunion faded and inflation remained stubbornly low—despite very aggressive fiscal policy and sharp increases in public debt outstanding, and very rapid expansion of central bank balance sheets—gold prices, as measured by spot prices, eventually fell by almost 50%.

Investors are concerned about many of the same issues today, as reflected in the resurgence of spot gold (see Figure 1). But they may be starting from a mistaken assumption. It seems obvious that rising debt levels create an incentive for governments to “inflate the debt away”, which appears to be at the root of the current concerns. But higher debt may simultaneously create a drag on economic activity that keeps aggregate demand in check and prevents inflation from accelerating. Inasmuch as it appears to us that debt accumulation in the current episode will be even more rapid than the rise after the GFC, the brake on aggregate demand growth and inflation should be even stronger this time around.

 

Figure 1. Debt, Inflation Concerns Appear to Be Boosting Gold Prices

Spot gold price per ounce (monthly), July 31, 2007–July 28, 2020

Source: Bloomberg. The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results.

 

If inflation does eventually accelerate, it would likely start three to four years from now, in our view, when the unemployment rate has returned to a very low level and, despite a strong labor market, policymakers decide that full employment is the most important priority of economic policy. The U.S. Federal Reserve would have to join in by relaxing its inflation target and agreeing to finance the push for permanent full employment by financing a portion of government spending through pure money creation. Those changes in economic policy priorities would then feed into inflation expectations, driving them upwards.

But that seems a long way off as the pandemic continues to rage, weighing on economic activity around the globe. In the meantime, inflation is likely to remain low; thus, we believe the price of gold should fall back as investor anxiety recedes.

 

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. U.S. Treasuries are debt obligations issued and backed by the full faith and credit of the U.S. government. Income from Treasury securities is exempt from state and local taxes. Although Treasuries are considered to have low credit risk, they are affected by other types of risk—mainly interest rate risk (when interest rates rise, the market value of debt obligations tends to drop) and inflation risk. The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. 

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

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