BLOGThe Bird's Eye View
Timely Perspectives, Unconventional Thinking
We’re excited to share timely market insights, thoughtful perspectives and expert commentary as part of our commitment to providing modern investment solutions to modern challenges.
BLOGThe Bird's Eye View
Timely Perspectives, Unconventional Thinking
We’re excited to share timely market insights, thoughtful perspectives and expert commentary as part of our commitment to providing modern investment solutions to modern challenges.
The Case for Gold Endures
Portfolio Manager and Senior Research Analyst
Portfolio Manager and Senior Research Analyst
Gold’s remarkable rally over the past two-plus years appeared to culminate with the outbreak of the Iran war. Once this risk was realized, it was not surprising to see the metal trade lower, which was consistent with supply shocks in the Middle East in the 1970s.
For much of the second quarter, gold demonstrated an inverse relationship with changes in the price of crude oil, weakening as crude rallied and strengthening as crude prices eased. However, gold and crude decoupled as expectations of tighter Federal Reserve policy appeared to take over as the primary driver of the gold price.1
Hot inflation readings for April and May combined with resilient consumer spending and retail sales prompted hawkish concerns in the market, and these were underscored by messaging from new Federal Open Market Committee chair Kevin Warsh, who took over for Jerome Powell in May. While Warsh’s nomination for the role in March initially had some observers questioning his ability to lead the central bank independent of Trump’s rate-cutting influence, sentiment regarding his credibility has since shifted markedly. While it remains to be seen if Warsh’s credibility is merely enjoying a honeymoon period at the start of his term, his consistently hawkish tone has helped push two-year yields and the dollar higher and gold lower. Notably, market-based expectations of US interest rates have continued to climb even as those for other major economies generally moderated.2
Warsh’s consistently hawkish tone has helped push two-year yields and the dollar higher and gold lower.
Though risk perception in the markets remains low, the risks—persistent geopolitical turmoil and troubling government debt dynamics among them—haven’t gone away. While the prospect of higher nominal interest rates in an inflationary environment may weigh on gold in the near term, we remain confident in the benefits of a strategic long-term allocation to gold as a potential hedge in diversified portfolios.
During the second quarter, easing tensions in the Middle East prompted a strong rally in risk assets, supported by strong earnings and artificial intelligence (AI) investment spending.
Much of this growth has been buoyed by US households’ absorption of tariff- and energy-related price increases. We can see this in the decline in the US personal savings rate to 3%, half the long-term average of 6%.1 Given the very high savings rate of the highest-earning Americans, this trend implies that lower-income households are spending more than they earn and are relying on debt to bridge the gap. This is something to keep an eye on because we expect consumers to eventually revert back to the long-term historical savings rate, to the likely detriment of corporate profit margins.
We expect consumers to eventually revert back to the long-term historical savings rate, to the likely detriment of corporate profit margins.
Meanwhile, spending on data centers and AI infrastructure relative to GDP now exceeds the dot-com peak, funded primarily out of operating cash flow and, increasingly, debt issuance.2 This current rate of growth seems difficult to sustain, in our view. Further, this spending has also produced frictions in the real economy, pushing up prices on inputs ranging from copper to dynamic random-access memory (DRAM) and serving as an inflationary impulse to the economy as a whole.
Although financial conditions in the US are pretty much the easiest they've been in the last couple of decades excepting the Covid-19 period, we have also seen a pronounced shift higher in US interest rate expectations of late even as those for other major economies generally moderated. In part due to the perceived credibility of new Fed Chair Warsh, two-year Treasury yields and the US dollar have risen as gold de-rated.3 That said, the Federal Reserve’s ability to increase interest rates meaningfully is constrained by the government’s need to continually roll over its very large primary deficit at prevailing higher interest rates.