The Consensus View On Gold Is Resting On Shaky Ground
Here’s the quick take on gold via Morgan Stanley:
Clearly a bearish view on gold from MS, also not a very deep view either. This is a classic example of what Howard Marks calls “first level thinking”. All of the points mentioned are known and already discounted by the market; we haven’t had a real panic from the eurozone for a few years, the US unemployment rate continues its steady downtrend which began at the end of 2009, and inflation has remained stubbornly low for the last few years.
This is all known and priced into the market. The question that second level thinkers (what isn’t known, understood, and priced in already) will want to answer is: What isn’t priced into the market and where are we more likely to be surprised over the coming months & years?
From my vantage point the market seems all too comfortable with a few consensus assumptions:
- Inflation will remain well anchored in the 1-2% range on core-CPI and will not become unhinged either to the upside (rising inflation above 2%) or to the downside (deflation)
- The Fed will be raising interest rates in the near future as it begins to ‘normalize’ monetary policy
- The eurozone has entered a period of stability and the ECB will always be able to use monetary policy levers in order to paper over fiscal problems within its member states
If even one of these consensus expectations does not come to fruition it would likely be a bullish harbinger for precious metals, and if a couple of them turned out to be badly wrong it could trigger the next leg higher in the gold super-cycle. For what it’s worth my money continues to be on the Fed remaining at zero for longer. Moreover, if and when the Fed does raise rates I believe it will be nothing more than passing gesture and there will be no rate-hiking cycle.
While the future is unclear, as always, second level thinkers are probably wise to consider gold as relatively attractive here given that the first level consensus currently has a distinct distaste for the shiny yellow metal.