Gold’s fade shows investors ‘not fully positioned for a prolonged stagflationary impulse’ – BNY’s Savage
After breaking its five-week winning streak last week, investors still see gold as an essential alternative to fiat currencies but don’t see the earlier momentum, and restoring the historical correlation between oil and gold will require either significantly higher oil or lower gold prices, according to Bob Savage, head market strategist at BNY.
“For the last week, investors shunned bonds amid fears an energy shock could reduce interest rate cuts in the U.S. and U.K. and raise rate-hike risks in the EU,” Savage wrote in a note. “Gold lost 3% on the week, the first drop in five weeks, as the USD bounced 1.7%, the most in four years. Oil rose by more than 20% and natural gas by more than 50%, prompting wider stagflation concerns across the world.”
Savage said BNY’s risk sentiment index also reflects this, “with iFlow Mood peaking two weeks before the conflict (99th percentile) and now back to neutral territory (64th percentile).”
“Investors are still watching gold as an alternative to fiat currencies, but there is notably less momentum and demand,” he added.
Going forward, Savage said that pressure is likely to build in the market to return the oil-to-gold correlation back to trend, which suggests “sharply higher oil prices or lower gold prices.”
“Most investors are motivated to treat the current conflict as noise and focus on the underlying economic trends,” he noted.
“Oil remains the transmission channel into inflation expectations, rates and currency markets, with the dollar’s resurgence echoing the 2022 energy crisis playbook,” Savage said. “Yet gold’s fading momentum and still-neutral risk sentiment suggest investors are not fully positioned for a prolonged stagflationary impulse.”
