Gold is Recapturing the Reflation Trade

Bitcoin’s boom and bust may have cleared the path for a new bull market in gold. So says Fidelity Investment’s director of global macro research Jurrien Timmer.

In an analysis for clients, the Fidelity strategist writes that some investors bought into bitcoin, believing it would serve as a good inflation hedge rather than holding gold, the more traditional hedge. But after bitcoin’s 50 percent plunge, the cryptocurrency seems to have lost the trust of those who thought it could protect them against inflation. Now gold, as well as silver, “are regaining control of the reflation narrative and may be ripe for a breakout,” argues Timmer. He sees gold rising back above the $2,000 level, up to $2,200 an ounce.

A key indicator to watch, he says, is the yield on five-year Treasury Inflation-Protected Securities (TIPS), which is a “real” yield, meaning it accounts for inflation. This rate can be heavily influenced by expectations for Federal Reserve policy, including interest rate adjustments and central bank purchases of Treasury securities. As the economy rebounds from COVID-19 and inflation expectations rise, the “real” five-year yield has been declining into negative territory. Silver, Timmer says, has been steadily tracking this five-year rate and, since bitcoin’s fall, gold is as well. Silver, Timmer predicts is headed towards $40 an ounce.