The source of the gold rally may be fear

Good morning. Happy “liberation day”. Liberation from what, you ask? We don’t know, but we look forward to finding out at 4pm eastern time. Our only prediction — made with some trepidation — is that the market will get less certainty on Donald Trump’s tariffs than it is hoping for. Send us your guesses: robert.armstrong@ft.com and aiden.reiter@ft.com. 

Gold and the two flavours of fear

Gold’s run seems unstoppable. It is now above $3,100 an ounce. We remember being told that demand would wane when it passed $2,100. It has outperformed just about every other asset class over the past year and a half. 

Gold bugs, I take back all the mean things I said about you over the years. I should, however, reiterate some points Unhedged has made in the past that remain true: 

The gold rally is not about inflation or real rates, at least not directly. Gold is a terrible inflation hedge and its usual relationship to real rates has broken down. 

Nor is it primarily about the de-dollarisation of currency reserves and central bank gold purchases. While central banks have bought more gold in the past three years than historically, there has been no increase in central bank demand to coincide with the current rally, which began in late 2023. In fact, says James Steel, chief precious metals analyst at HSBC, central bank demand has fallen in recent months. Chart from the World Gold Council:

Nor is retail investor demand a sufficient explanation. WGC data shows weak demand for jewellery last year and flat demand for bars. And below is a chart of the gold holdings of exchange traded funds plotted against the gold price. Flows into ETFs have risen strongly lately, but notice that the big rally started when the gold holdings of ETFs were still falling, and that the correlation between the gold holdings of ETFs and the price seems weaker in the past few years than in the previous couple of decades.

This leaves us with demand from institutional investors. This is a bit harder to track, but we might ask, why would asset managers, insurance companies or hedge funds be buying gold? The easy answer is they see it as a hedge against economic and geopolitical instability or, to put it more simply, they are buying out of fear. And given the source of much of the instability is US policy, this makes sense. Normally, uncertainty would create a bid for the US dollar and Treasury bonds. But some investors may take the Trump administration seriously when it says it wants to meaningfully weaken the dollar. And for those — Unhedged among them — who believe that high and unstable inflation may well be here to stay, Treasuries aren’t a very appealing haven, either. 

One question, though. I look at that first chart, and gold looks like a trade that has a lot of momentum. We know that momentum can take on a life of its own. So I wonder: is it entirely fear about policy or economic growth that is driving gold — or is fear of missing out playing a role, as well? 

More on hard and soft US economic data

We have been thinking a lot lately about the contrast between the very bad “soft” economic data (based on surveys) and the mostly-still-good “hard” data (based on transactions). Yesterday, we got a number of new data releases, which seem to confound the relationship: the soft data is bad but not all bad, and the hard data is getting worse, but only by a little.

On the soft data side: March ISM surveys showed manufacturing slipping back into contraction, after two months in expansion. Employment and new orders have backed off, and inventories are rising, likely because businesses are buying ahead of tariffs. The team at Rosenberg Research points out that the ratio of orders to inventories has plummeted, and is now at the level that, in normal times, is associated with recessions (chart of the ratio of orders to inventories from Rosenberg Research):

Services, however, are doing well — suggesting economic strength, outside the sectors set to be most directly hit by tariffs.

The hard data is more difficult to parse. Yesterday, we got a Job Openings and Labour Turnover Survey that looked, on balance, weak. Job openings decreased at a faster clip than economists anticipated, falling 194,000 in the month to 7.6mn total. Quits were down by a little, and lay-offs crept up to a five-month high — with weakness in retail, finance, and, as one might expect, government. It looks like Elon Musk’s Department of Government Efficiency is starting to leave a mark:

Interpreting Jolts data is tricky. As long as they are in a reasonable range, simultaneous increases in lay-offs, openings and quits can be signs of a healthy job market, where businesses do not feel anxious about filling their labour needs and where both jobseekers and employers are open to finding a better fit. But they have to be working in concert: a simultaneous jump in lay-offs and drop in openings signals economic fears, where a rise in openings and an increase in lay-offs can signal optimism. Stalling quits, rising lay-offs and falling openings — which is what we are seeing now — together suggest that bad vibes are translating into painful employment decisions.

However, while the direction of changes are concerning, the numbers are not far from pre-pandemic trends. According to Bradley Saunders at Capital Economics, the latest Jolts data suggests the labour market is “settling back into its pre-pandemic norms”, including the historic relationship between unemployment and job openings (the “Beveridge curve”). Last month’s changes, in other words, are not that bad. Beveridge chart below from Capital Economics: 

We have had this question about economic data for a few years now: what is a slowdown, and what is normalisation after an unusually hot post-pandemic economy? 

We also got mixed hard data in construction yesterday. Census figures showed that construction spending went up for February; it grew at 0.7 per cent month-on-month, higher than expected and the fourth month of growth out of the past five. The biggest gains were in single family housing and home improvement. That resonated with housing starts data from February, and signals some underlying strength in the economy. But there was some weakness in the report: construction of manufacturing facilities was flat, and spending on hotels and offices were down. Permits for new private housing were down in February, too. The year-over-year spending trend across all construction sectors looks concerning: 

(We are not sure what happened in 2019; write to us if you know).

The soft data and the hard data do appear to be converging, slowly and unevenly, around a weak, but not very weak, outlook. However, given the high levels of uncertainty, Unhedged would want to see more bad hard data before putting high odds on a 2025 recession.

(Reiter)

Correction

Yesterday, we said wealthy consumers have a higher price elasticity of demand. As many helpful readers pointed out, we got the direction wrong: wealthy consumers have a lower price elasticity of demand, meaning their demand is less sensitive to price. We apologise for the error.

One good read

Globalisation is good for burritos.

FT Unhedged podcast

Can’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.