The panel comprised Dr Peter Zöllner (Head of the Banking Department, Bank of International Settlements), Izabella Kaminska (Founder, The Blind Spot), Saad Rahim (Chief Economist, Trafigura) and Adrian Ash (Director of Research, BullionVault). Andrew Verity (Economics Correspondent, BBC) moderated the session, which explored current and future macroeconomic and geopolitical concerns and risks.
Andrew Verity (AV): Does the energy crisis raise geopolitical risks such as resource nationalism and subsequent disruption of key raw materials?
Adrian Ash (AA): Well, certainly for gold – and precious metals more broadly. We’ve already seen this with Russia and the Western response to the invasion of Ukraine. In terms of geopolitics, there’s a real risk of new blocs forming, particularly between Russia and China. My sense is that Beijing is not particularly happy with Russia; this really rocks the boat.
Saad Rahim (SR): I think your point about new commodity blocs is absolutely right. It’s one I’ve made a few times as well, because we’ve gone from a world where Europe and Russia were so entwined that it was hard to envision a separation. But now that train has left the station, at least as far as energy is concerned. And we have Russia, Iran, India and China ostensibly forming a new commodities bloc on the other side of the world. Sanctions are a very blunt instrument and are hard to enforce globally. Without secondary sanctions, then all you’re doing is redirecting rather than reducing.
AV: What were the high inflation indicators that we were missing, or what data should we have paid more attention to?
Izabella Kaminska (IK): The obvious consequences of lockdown policy and the fact that supply side would be constrained. Early indicators were obviously the semiconductor issues that were coming out in terms of bottlenecks. There was the difficulty in rehiring staff coming back from furlough. I think another sign was the huge engagement by people on furlough in, say, stock market trading. We had that whole phenomenon of the ‘stimmy’ check in the US and people riding on the highs of temporary stock market gains. I think that was also an interesting indicator, because what goes up has to come down – and the people who did well from this windfall are now very difficult to woo back to the workforce.
In around Q3 of 2021, natural gas prices were already going up, so we had a very clear indicator then that there was something unique going on in the energy markets. I think the big blind spot at that point was the idea that Putin wouldn’t take advantage of our clearly distressed supply and demand situation in Europe, because it was self-evident at that point – for reasons unconnected to Putin – that net zero had driven us to a position where we were facing a deficit.
SR: We were missing the fact that there had been massive underinvestment across supply chains and, in particular, in commodities. Coming into this year, at Trafigura, we were looking at the oil markets and could see that it was an incredibly fragile system. There was no slack, all it would take was a sharp blow to disrupt. That blow was the invasion of Ukraine.
AV: What was missed by central banks, because they weren’t anticipating the situation to be so long lasting? They were all saying it would be transitory.
PZ: In the first few quarters after the pandemic hit in early 2020, there was quite a big consensus between central bank economists, private economists and banking economists that a likely outcome would be a sharp drop in GDP and also a fall in the inflation rate from already low inflation rates. There was a discussion about deflationary effects.
The changing point probably was about one year after the pandemic began. Nobody really knew what the next winter would bring. It’s always easy to judge from three years later, and I think there was a point when some inflationary figures came out showing particular impact in the goods industry. But at that time, there were signs that the pandemic had lowered participation rates in the labour markets. Many people in the industry said that inflation would peak in early 2022. With regards to central banks, the US Fed was expected to raise rates four times, 25 basis points, during this year.
The change came at the end of December 2021, when the Fed indicated a shift to end its asset-buying programme and that it favoured raising rates at a faster pace than expected in 2022.
AV: What has been the interaction between inflation and the gold market?
SR: Gold in particular has been an interest rate story. It struggled to perform in what should be laboratory conditions, given how much inflation and geopolitical uncertainty there is, and if it has not performed, it’s because of what’s happening on rates. So when I look at next year, instead of this nice curve where everyone’s rate projections start to come off by the end of the year, maybe it’s time to think about going higher again? And that is a world I don’t think people are really thinking about.
AA: We have geopolitical stress like we haven’t seen for – frankly, in my lifetime, I don’t think. But what is it that’s pushing against gold? Well, it’s the rising interest rates.
People assume inflation is good for gold. The case for gold as an inflation hedge is intuitive. Throughout all human history, gold has been the ultimate prize. There’s a natural sense everybody has that gold is a great inflation hedge – and research suggests that it is, over the very long term. But shorter term, within my lifetime? No, it’s not a very good inflation hedge, because there’s no actual relationship between inflation rates and the gold price. There simply isn’t one.
If we’re asking why isn’t the gold price higher, given current geopolitical factors, I think we should be turning the question on its head and asking why hasn’t gold dumped on rising interest rates?
AV: The consensus is we’ve got bad inflation now. Is it possible that we’re maybe underestimating the risk of deflation? What’s the next blind spot?
IK: They say there’s no better cure for high prices than high prices. Usually, there’s a lot of logic to that, but I think the idea that we’re facing a deflationary period has a fairly strong consensus. I think that is the markets’ expectation, rather than being a blind spot, but there are certain bottlenecks this time around that invalidate that old adage about high prices, because we’re facing headwinds that are related to ESG and other real financing issues – among them, the increasing politicisation of the dollar.
Dollar neutrality was the way free markets would penetrate command economy structures. Now, we’re doing the exact opposite. We are basically applying capital control mentality and we are politicising the dollar, and that is going to create an opportunity for a new mutual entity financing tool – whether it’s Bitcoin or gold. There is no true neutral asset. Money needs to be neutral to be able to conduct price discovery between these different political blocs. I think that’s the blind spot that we are facing: how markets will adjust to the lack of a neutral financing intermediation point.
You can watch the full session on the LBMA website.