Gold Continues to Outperform
This year, gold has been one of the strongest performing assets across the market. Often viewed as the most traditional hedge, gold tends to be uncorrelated to equities and rises in times of stress.With equities delivering strong returns this year, what has been driving these strong returns in gold?
For starters, the weaker dollar has been a plus. Policy uncertainty has also increased global demand for gold, specifically among global central banks. The World Gold Council estimates that gold is now held as 26.8% of global currency reserves, underscoring its traditional use as a non-dollar currency hedge. Also, US fiscal deficit stress and fears about the Fed’s ongoing independence continue to manifest into higher prices for gold.
With so many of these issues still unresolved, paired with an administration set on keeping the globe off balance, we expect gold to remain a valuable tool for portfolio diversification.
Inflation Expectations
The chart below plots future inflation expectations as they stand today, last month and one year ago.One year ago, the Fed made its first interest rate cut of 0.50%. The Biden administration was still in office and not engaged in the trade policy volatility we are currently experiencing. At the time, inflation was subsiding, and victory appeared to be on the horizon.
Fast forward to today and we can see that expectations have elevated in the short term but are still trending lower over the long term.
This chart is critical for the Fed when it is making policy decisions because it represents one of the most important battles in the war against inflation.
When expectations become unanchored, consumer behavior quickly shifts to reflect these expectations, oftentimes creating a self-fulfilling prophecy.
This curve remaining well anchored in the long term is also a signal that the market still believes that the Fed will ultimately guide policy to reach its targets.
As Fed independence becomes a more debated topic, specifically heading into the end of Chair Powell’s term in 2026, we’ll be watching this chart for clues on how the market is grading the Fed.
