Why the Consensus Bearish View on Gold is Misplaced
This is from the latest Morgan Stanley “Commodity Manual”:
This is part of the gold note contained in this report and also happens to be the sort of consensus sell-side research which offers
zero negative value to its readers. Let’s break down the 3 components of this bearish gold outlook:
1. Oil price sell-off which undermines inflation risk: Deflationary pressures and weakening economic growth (of which a dropping oil price is a by-product) triggers further monetary policy accommodation by global central banks and pushes out rate hikes which are both bullish for gold. It is a misconstrued notion that “inflation” is bullish for gold, the threat of extremely high levels of inflation is a reason to own gold but rising levels of inflation (from a low base) are not in fact bullish for gold as they are likely to be accompanied by monetary policy tightening.
2. USD strength: Yes, it is a fact that the US dollar has been very strong for the past 6 months. Does that mean that the dollar will be strong for the next 6 months? And is a strong dollar always bearish for gold? The answer to both questions is obviously a resounding NO. In fact, I would argue that dollar strength that primarily results from foreign central bank stimulus and economic weakness is actually bullish for gold.
3. Market-wide expectation of rate hikes in the US: Where do I even begin with this one? Haven’t we learned enough from “market-wide expectations” already? There were also market-wide expectations for rising rates during 2014 and the exact opposite occurred. To use market-wide expectations of a certain event as a rationale for not owning a specific asset is the absolute height of investing folly.
Here’s what MS had to say about crude oil markets on September 9th, 2014 just before oil began plunging:
The firm was looking for prices to “recover” back to above $100/barrel:
Oil prices have instead fallen by more than 50% in just 4 months, need I say more?…
Think for yourself, put consensus views to the test and find areas in which they are not rigorous (see above). The consensus view is often correct, however, when it is incorrect it is often badly wrong. I expect the current consensus bearish view on gold to badly wrong for many of the same reasons that the consensus bullish view on gold in August 2011 was also badly wrong i.e. rear-view mirror thinking, badly flawed understanding of how monetary policy works, and crowd psychology.