The persistently hawkish stance from the Federal Reserve continues to weigh on sentiment in the gold market. After initially falling below the level on June 24th, spot gold once again dropped below the psychological barrier of $4,000 per ounce on June 25th. Since reaching a near-historic high of around $5,600 per ounce in late January this year, the gold price has corrected by approximately 29%.
The market widely attributes this decline to the more hawkish policy signals emanating from the Fed. Amidst growing expectations that interest rates will remain higher for longer, the attractiveness of US dollar-denominated assets has increased, significantly squeezing the allocation value of gold as a non-yielding asset.
However, Asymmetric Research offers a different perspective, arguing that simply equating rate hikes with gold price weakness is not accurate. The firm points out that historical experience shows the key variable determining gold's medium to long-term trend is not the absolute level of nominal interest rates. Instead, it hinges on whether the Fed can effectively control inflation and whether the economy has a foundation for a return to robust growth.
Within its analytical framework, the current macroeconomic environment is closer to 1978—the stage just before the final inflation surge of the 1970s and the onset of a new trending bull market for gold. Anchoring to this historical reference point provides a crucial guide for assessing the current trajectory of gold prices.
Historical Lessons from the 1970s: Gold Rose Concurrently with Rates
For a long time, investors have generally believed that rising interest rates increase the opportunity cost of holding gold, thereby suppressing its price.
But Asymmetric Research notes that the history of the 1970s does not support this view. During that period, while US interest rates climbed persistently, the price of gold maintained an upward trend for the most part.
The firm's analysis indicates that the periods of significant correction for gold in the 1970s primarily occurred after the Fed's rate hikes pushed the economy into recession. Even then, the average pullback for gold was about 19%, and it typically resumed its upward move after roughly four months.
The two phases that truly ended the gold bull market were from 1975 to 1976, and post-1983. Both these periods shared a common backdrop: the market believed the Fed had successfully defeated inflation, and the economy was entering a phase of strong expansion. For instance, US GDP growth exceeded 5% in 1976; from 1983 to 1993, the US economy averaged growth rates of over 4%.
The Present Resembles 1978, Not the Start of a Bear Market
Asymmetric Research believes the current US economic environment bears a high degree of similarity to the late 1970s.
The firm's report suggests that the trajectory of the US Consumer Price Index may be mirroring the path of the late 1970s. If this historical correlation holds, the current phase could be analogous to 1978—just before the final acceleration of inflation and the launch of a gold rally.
In this scenario, gold is not yet in a long-term bear market but may be in a corrective phase ahead of its next upward move. The research firm argues that the market is overly focused on interest rate changes while underestimating the persistence of inflation and the constraints that fiscal pressures place on future monetary policy.
In a High-Debt Era, the Fed's Rate Hike Capacity is More Constrained
Asymmetric Research points out that compared to the 1970s, the current US financial system's ability to withstand high interest rates has significantly diminished. The reason is that the ratio of US federal debt to GDP is now 3 to 4 times higher than in the 1970s, and the fiscal deficit as a percentage of GDP is also larger.
This means that even if the Fed wishes to curb inflation through sustained rate hikes, the pressure from high interest rates on government financing costs, economic growth, and financial market stability is more pronounced. The research firm believes the current environment does not provide the same conditions as the early 1980s for decisively ending the inflation cycle through aggressive tightening policies.
Gold's Pullback May Present a Buying Opportunity
Despite gold's rapid recent decline, Asymmetric Research maintains a bullish outlook. The firm's base-case scenario suggests further downside for gold is limited, and the current market sell-off could represent a buying opportunity for long-term investors.
Based on calculations using gold's historical drawdown data from the past 30 years and over 50 years, the firm believes the price bottom for gold may be situated around $4,000. Specifically, using the median of the maximum drawdowns over the past 30 years, a reasonable bottom could be approximately $4,030 per ounce. If referencing cycles over 50 years, an extreme scenario could see a dip towards $3,640 per ounce.
In other words, even if gold continues to correct, the remaining room for decline may be relatively limited.
The Next Gold Cycle Hinges on Inflation and the Dollar's Direction
Gold's previous major bull run was primarily driven by central bank purchases, geopolitical risks, and inflation concerns. Recent dollar strength and the Fed's hawkish policy pivot have pressured gold. However, Asymmetric Research contends that if inflation proves difficult to subside quickly in the future and the Fed remains constrained by the high-debt environment, gold could still enter a new cyclical upturn.
In the firm's view, the current market is replaying the key juncture of 1978: investors are selling gold due to short-term interest rate pressures, but what will ultimately determine the long-term trend is whether US inflation spirals out of control again and whether the credibility of US monetary policy continues to be challenged.
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