Faded Gold, No Rebound Despite Weakening Reflation Trade

[Asia Economy Reporter Ji Yeon-jin] Last month, as the global manufacturing index (PMI) declined and cyclical stocks showed weakness, signaling a weakening of the 'reflation trade,' attention is turning to a potential rebound in gold prices. However, the financial investment industry expects that gold prices will continue to weaken due to the high likelihood of a phase where real interest rates rise.

According to the Korea Exchange on the 19th, the international gold price fell 0.37% from the previous day to $1824.95 per ounce on the 16th. The international gold price exceeded $2000 per ounce in August last year when COVID-19 was spreading globally, but as vaccination efforts accelerated, it declined to the low $1700s by last March. After rebounding, gold prices recovered to $1916 at the beginning of last month but have shown weakness again over the past month.

Typically, gold prices have strengthened at times when the reflation trade weakens. The reflation trade refers to buying stocks under a reflation scenario where inflation rises moderately enough not to cause runaway inflation, with the expectation that the economy and prices will recover. Generally, in such phases, bond selling occurs alongside buying undervalued value stocks or cyclical stocks. Conversely, when the reflation trade weakens, there is a notable shift toward safe-haven assets rather than risky assets like stocks. The recent decline in the copper-to-gold price ratio is also interpreted as a weakening of the reflation trade.

However, the financial investment sector recommends reducing exposure to gold. Last month, the U.S. Consumer Price Index (CPI) was 5.4%, exceeding both market expectations (4.9%) and the previous month’s figure (5.0%). Nonetheless, it is expected that once the base effect of oil prices, which drove inflation, ends, expected inflation will slow down. This could suppress gold’s demand as an inflation hedge due to rising real interest rates.

Choi Jin-young, a researcher at Ebest Investment & Securities, said, "Considering economic momentum and the weakened reflation trade, gold prices could rebound to $1900 per ounce," but added, "Following recent comments on tapering by Jerome Powell, Chairman of the U.S. Federal Reserve, there is a possibility of a slowdown in the decline of nominal interest rates, and expected inflation is also slowing. Considering the direction of real interest rates, gold prices, which have an inverse correlation, remain vulnerable."

This content was produced with the assistance of AI translation services.