Conflicting parties restrict gold supply.
In the first half of the year, central banks' net gold purchases have reached 333 tonnes, a figure that matches pre-pandemic levels, signalling a return to normality in reserve management strategies. Notably, Thailand, Hungary, and Brazil have emerged as the top buyers, with China expected to continue substantial gold purchases in the coming months.
The global financial landscape is marked by a significant degree of uncertainty, as traditional market signals have been distorted by radical fiscal and monetary policies initiated since the global financial crisis. This distortion is particularly evident in the divergence between the U.S. dollar and bond markets. While the strength of the U.S. dollar indicates a healthy economy attracting investment flows, bond markets reflect concerns about the increasing impacts of the Delta variant and fears that the economy could suffer as the Federal Reserve begins to unwind its stimulus measures.
The abundance of liquidity at almost zero cost can drive markets without regard for fundamentals, a phenomenon that has been exacerbated by investors' desperation for yield. Billions of U.S. dollars can influence market movements, often disregarding traditional economic indicators. Without the liquidity provided by governments, stock and bond markets could collapse once stimuli wane.
The divergence between the U.S. dollar and bond markets is a testament to the high level of uncertainty prevailing in the global economy. According to experts, if the bond market accurately predicts economic weakness, current inflation could transition into stagflation. Declining yields in bond markets suggest expectations of an impending economic slowdown.
Inflation, driven by supply bottlenecks and growing demand, poses a significant risk, according to economist Foster. He believes that long-term inflation could be sustained due to record money supply, structurally higher commodity prices, demographic shifts in labor, and trade rebalancing.
However, gold, a traditional safe haven, continues to fulfil the main objectives of reserve management: security, yield, diversification, and hedging. The central bank governor of Thailand stated that gold serves these purposes effectively, and its continued purchase by central banks like China underscores this point.
In conclusion, the global economy and financial markets are navigating uncharted waters. The distortion of traditional market signals, the abundance of liquidity, and the uncertainty surrounding the recovery from the pandemic all contribute to a complex and dynamic environment. As we move forward, it will be crucial to monitor these trends and adapt strategies accordingly.
