From inflation to stagflation

The new mindset

While the US Federal Reserve has increased interest rates to some extent, the ECB has not done the same so far. Even without rate hikes, the first two quarters have been terrible for European stocks and bonds. We face an interesting situation. While inflation is soaring, the market has entered an aggressive bear market. This wealth destruction is now also affecting inflation through demand destruction. This dynamic can both be seen in the USA and Europe. Europe also faces a big energy crisis this winter, which further fuels the mindset of the “last good summer”, following two years of totalitarian covid restrictions.

Disinflationary environment

We are currently witnessing a lot of deflationary events. Falling stocks and bonds, recession fears, and a strong US-Dollar to just name a few. If these pressures continue, this will most likely lead to a decrease in inflation over the coming months. In this scenario, central banks could feel, that they have done a good job and that they now can restart the printing press to fight the economic downturn. We then expect to see the second inflation wave.

Gold’s next move?

Considering the fact, that we have been in crisis mode for over two years now, the performance of gold is certainly underwhelming. On the other side, gold has weathered the current general bear market quite well, and has seen multiple new all-time highs in countries, where the currency is being wittered away. Regarding the price of gold in US-Dollar, it will all depend on what the Federal Reserve does next. If they start talking about stopping rate hikes, we could see a significant upwards move in gold. Another scenario could be a weakening US-Dollar.

The new super-cycle

Many commodities are currently also experiencing a harsh bear market. This should not be all that disconcerting. The underlying reasons, which drive this new commodity super-cycle, are intact. The push for “green” energy in more electric vehicles and many other technologies will result in increased resource demand. All of this, while investment into the industry is at an all-time low due to ESG. This dynamic, combined with geopolitical pressures, will lead to much higher commodity prices, which in turn will make them a worthwhile investment.

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