The Inflation Time Bomb: How Reduced immigrants May Spark Price Hikes.
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This year, gold prices have risen by an impressive 32%, outpacing even the average gains of tech stocks. For instance, the QQQ index has only increased by about 20%, while the S&P 500 has seen a rise of around 22%. This trend suggests that while U.S. equities are reaching new heights, there's also a significant movement toward safe-haven assets like gold.
This duality raises questions about the current market sentiment: Is it optimistic or pessimistic? How can investors feel nervous enough to buy gold while also being very bullish on stocks? It creates a contradiction.
The situation in the markets reflects a preference for risk assets, driven largely by earnings reports. Meanwhile, the rise in gold prices indicates an undercurrent of uncertainty linked to the political landscape and upcoming presidential elections.
Historically, we've observed that swing states play a crucial role in election outcomes. Currently, polling shows a tight race, with Joe Biden maintaining a slight lead in the popular vote. However, significant changes have emerged in swing state polls since mid-October, showing an upward trend for Trump.
States like Arizona and Georgia are now showing Trump in the lead, with North Carolina also shifting in his favor. Conversely, Kamala Harris, who previously led in several states, now has only narrow margins in places like Michigan, Nevada, Pennsylvania, and Wisconsin, with averages fluctuating between 0.8% and 1.2%.
As we move closer to the elections, these shifts in polling could significantly impact market dynamics and investor sentiment. It's important to understand that swing states have become truly unpredictable in recent elections. Historically, swing states have shown some consistent patterns, but in 2016, almost all supported Trump, while in 2020, they swung heavily toward Biden. This rapid change indicates a level of uncertainty that we've not seen in previous elections.
First, this unpredictability raises significant concerns about the potential for Trump to win again, especially as his chances appear to be improving in key swing states. Secondly, the election outcomes will have a substantial impact on inflation risks moving forward.
Gold prices reflect changes in interest rate expectations but also serve as a hedge against inflation, which is a major concern right now. Many believe that regardless of who wins, we could see a new wave of inflation driven by government policies.
Examining current immigration policies sheds light on this issue. The Democrats propose reducing immigration from 350,000 to between 140,000 and 260,000, effectively limiting the influx of immigrants. The Republicans, on the other hand, have a more drastic plan, aiming to cut immigration down to 80,000 by 2025, which would return immigrant levels to what they were in 2018.
These proposals suggest a major shift in the labor market. If we suddenly reduce the workforce by 2 to 3 million, it would create a significant labor shortage, driving wages higher. Historically, undocumented workers have helped suppress wage growth, but their removal would lead to an increase in wage demands, resulting in a new inflationary cycle.
For instance, recent labor strikes, such as those involving dock workers, ended quickly because of the significant wage increases agreed upon. This shows that whether it’s through reduced labor supply or direct wage hikes, we are likely to see rising wages, which could lead to new inflation expectations.
If Trump wins, inflation could worsen, prompting the market to react accordingly. Investors are likely to seek out assets that can withstand inflation, such as gold. Despite the allure of stocks, which are currently high, rising labor costs will ultimately affect corporate profits, potentially leading to declines in stock prices.
Recently, gold prices have hit new highs, currently sitting at around $2,700 per ounce. While this price seems comparable to $2,646 in 1980, adjusting for inflation reveals that $2,646 in 1980 is actually equivalent to about $9,281 in 2024. This indicates that gold has been trailing behind inflation for quite some time and is now beginning to catch up.
Gold has a consistent track record of rising in response to monetary easing, a trend observed across multiple administrations from Bush to Biden. As long as the money supply continues to grow, we can expect gold prices to keep climbing. The current simultaneous rise in both risk assets and safe-haven investments suggests distinct underlying factors driving these trends. However, this upward momentum appears likely to continue in the near future, with both the stock market and gold prices set to rise further.
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