The End Of Reflation? Implications For Gold

In the previous editions of the Market Overview, we wrote about the reflation trade. We analyzed the important signals of the uptick in economic activity and inflation all over the world, arguing that the upcoming reflation does not look encouraging for the gold bulls. However, we now see signs that reflation is weakening. What happened and what are the implications for the gold market?

As a reminder, reflation started to attract the attention of investors at the end of 2016 and was based on two pillars: 1) Trump’s rally, i.e. rising expectations about the fiscal stimulus provided by the new administration, and 2) accelerating global inflation and economic growth. As a result, interest rates surged, while the price of gold plunged.

The problem is that both drivers of reflation trade have weakened recently. The failure of Trump to repeal and replace Obamacare undermined markets’ confidence in quick and smooth implementation of the new administration’s pro-growth agenda. Some pundits argue that the Trumpcare’s failure is actually a good thing, because now the administration will quickly shift to the subject of tax reform. However, such a line of argument is totally wrong as it overlooks significant divisions among Republicans and the fact that healthcare reform was supposed to reduce government expenditures, enabling or at least facilitating the tax cuts. This is something we warned against in the February edition of the Market Overview: “the faith in Trump’s beneficial economic policies may be too optimistic.”

Of course, the reflation trade is something bigger than Trump’s rally, as the uptick in economic activity started significantly before the U.S. presidential election. For example, the U.S. annual inflation rate has risen from 0 percent in September 2015 to 2.8 percent in February 2017. However, it slowed down to 2.4 percent in March. We have seen similar dynamics in the Eurozone where the harmonized annual consumer inflation rate slowed down from 2 percent in February to 1.5 percent in March, as one can see in the chart below.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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