This week saw a key part of the US yield curve inverted for the first time in 16 years. The US 5-year – 30-year curve inverted on rising inflation fears. The basic concern is that high inflation is going to force the Fed to be more aggressive in hiking rates in a way that slows growth.
Remember, if interest rates rise that will mean mortgage rates go up and debt becomes more expensive to service. If, on top of rising rates, inflation driven by supply chain issues & Russian risk pushes food and energy prices even higher the consumer’s disposable income will be reduced. This in turn will hind the outlook for future profitability. This is what would ultimately result in a stagflationary environment.
What’s the trade?
In this situation, gold tends to gain very well. Gold has long been lauded as an inflationary hedge and gold prices should gain. Furthermore, the CHF should also strengthen as that too should gain on an inflation play. There is a strong correlation between the strength of the CHF and higher gold prices due to the strong connection between gold pricing and the CHF. Around 70% of all gold is processed through Switzerland and the gold industry is one of the key pillars of the Swiss economy. On the weekly chart, risk can be easily contained for investors who think that a stagflationary environment is coming. See the weekly chart for gold for a place where risk can be easily managed. However, if US growth can keep on that would mean a more reflationary environment and would not be expected to benefit gold prices in the same way.