The US dollar’s decline during the COVID-19 pandemic has led to an increase in asset prices. While many talk about investment bubbles, we may just witness a classic inflationary spiral.
The US equity markets are running hot. In addition to sitting close to all-time highs, the major stock market indices have had a great start to the trading year. Moreover, during the first one hundred days of Biden’s presidency, the stock market delivered 8.6% in total returns – the biggest gain since President Kennedy in the early 60s.
Admittedly the other presidential cycles did not start with the economy benefiting from record lax monetary and fiscal policy. Nevertheless we should give credit where credit is due and admit that the new US administration moved quickly to approve the fiscal stimulus that helped the economy grow more than 6% in the first quarter of the year.
Everything Is Up
But it is not just the stock market that is riding high. Everything is up, except one – precious metals. This is particularly interesting because the decline in precious metals contradicts the very reason why everything is up, namely, higher inflation.
Recently, inflation is back on everybody’s lips. Economic data suggests that the prices of goods and services will accelerate to the upside in the months ahead. Prices paid in the manufacturing sector have increased to levels not seen since the previous inflationary period in history, in the 1970s. Chips and semiconductors shortages have led producers to increase their prices, and the change in the price level will eventually be moving on the consumer side.
Naturally, that translates into higher inflation. How do financial markets express upcoming rising inflation? The best way to exemplify it is to have a look at the chart above. Energy prices, livestock, agriculture, and industrial metals prices are all up.
However, gold and silver are not following the same path. They are traditionally anti-inflationary instruments, yet this time the logic is flawed, because the US dollar is down, as it should be during periods of rising inflation, but precious metals are, too.
Is the dollar decoupling from the inflationary theme? Definitely, not. Are investors using other asset classes as a hedge against inflation? Possibly, as the only other alternative is the increased interest in digital assets instead of precious metals.
A decoupling, therefore, does exist, but between gold and digital assets rather than gold and the dollar. If that is the case, stocks are in for a longer run.