Gold Is Flashing Inflation, Not North Korea
A rising currency and rising prices at home in the world’s largest manufacturer is a double whammy for buyers of Chinese godos
By Nathaniel Taplin
STILL GLITTERING
Change from a year earlier
Gold loves inflation while Treasury bonds hate it. So why are both having such a smashing year?
Prices of the precious yellow metal have moderated a bit in the last few days, but remain near a year-high. The yield on benchmark 10-year U.S. Treasurys meanwhile touched a year-low late last week. These simultaneous trends are unusual. Gold prices normally rise when investors are worried about inflation; bond prices normally go up when the opposite is the case.
One possible factor in gold’s surge is its role as a haven in times of geopolitical trouble. That seems overblown, though: Tensions in North Korea may be ratcheting up but a full-blown conflict remains a low probability. Worries about the region probably only account for about 15% of gold’s 10% rise since mid-July, estimates Jeff Currie, head of global commodities at Goldman Sachs .
THE PEOPLE´S CURRENCY
Chinese yuan per dollar
Sure, most analysts expect another weak August inflation reading for the U.S. on Thursday, and continued tepid wage gains may bear that out. But there are plenty of reasons to expect steady, if not scorching price gains in the West in the next 12 months. The most obvious is the U.S. dollar’s 10% decline so far this year, which has helped push up the price of all commodities, including gold.
A less appreciated factor is China, the world’s largest goods exporter and biggest consumer of most industrial commodities. China’s currency has risen sharply this summer, boosting the cost of Chinese goods. Meanwhile, inflation has also remained stubbornly high within China, in part due to Beijing’s campaign to shut down excess factory capacity in steel, aluminum and other industrial sectors.
A pricier yuan and costlier goods in yuan terms is a double whammy for foreign buyers of Chinese goods—namely everyone.
Sure, an inflationary blowout remains unlikely. Chinese policy makers are starting to signal discomfort with the pace of the yuan’s rise—the nation’s central bank eased two-year old restrictions on shorting the currency over the weekend. And slower growth in China’s property market, which drives demand for everything from cement to steel to copper wiring, will likely begin to put a damper on things in the closing months of 2017.
Still, the bubbly sentiment in Treasurys in recent days risks underestimating the chances of higher prices to come. This time around, it’s gold bugs whose inflation antennae may be better attuned.
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