A number of factors in the economy are converging to result in circumstances similar to the 1970s. Meanwhile, gold just can't surpass the strong resistance at $1,800 amid fears of a taper tantrum. According to Bank of America, gold was the first asset to "smell" the 2013 taper tantrum, so it could be the leading edge of asset indicators suggesting tapering.
Analyst views on gold differ
The gold price ticked slightly higher after weaker-than-expected U.S. retail sales on Tuesday, but it failed to surpass the resistance level of $1,800. Retail sales for July fell 1.1% from June, while economists had been only expecting a decline of 0.3%.
July marked the second time in three months that consumers reduced spending. The markets didn't react much to the miss, but investors may be wondering whether it means consumers have gotten worried about the new variants of COVID.
According to Kitco, some analysts are warning investors that the gold price could drop further, especially since it hasn't been able to break through the resistance at $1,800. Dominic Schnider of the UBS Global Wealth Management CIO Office told Bloomberg that he advises investors to hedge their strategic positions or exit their tactical positions. He questioned why investors would want to keep holding so much "insurance asset" even though the world "looks better." Schnider sees room for gold to fall toward $1,600 an ounce.
Not all analysts expect gold to drop, however. Goldman Sachs predicts that the yellow metal will hit $2,000 an ounce by the end of the year amid improving demand. Craig Erlam of OANDA noted that U.S. yields started to soften this week, giving the metal a much-needed boost. However, he also said the $1,800 an ounce level is important for gold right now.
"This marks a 50% retracement of the June highs to August lows and could be a big psychological test for gold," he explained in an email. "That said, $1,815-1,825 is arguably more signficiant [sic] with it falling around the 61.8 fib level, prior highs and 200 day moving average. A move above here may come as a surprise to many and send a very bullish signal to the market."
Warning signs from the past
While investors watch the Federal Reserve for signs that it will start to taper, Bank of America looked back into history and found some alarming signals. The firm said 45% of U.S. consumers say it's a bad time to buy cars, houses and durable goods because of higher prices. This is the highest percentage since the 1970s, and it stood at only 9% at this time last year. Bank of America said inflation is leading to weaker consumption — as demonstrated in the July retail sales report. As a result, stagflation is here.
Another concern for the economy is wage inflation. Average hourly wages are annualizing up 4.2% for the past six months, making wage inflation the new normal. Bank of America said this trend would continue because there are 10 million job openings versus only 8.7 million unemployed Americans.
Additionally, the number of small businesses saying they will raise compensation in the next three months is at the highest level since 1973. Sectors with the biggest worker needs are seeing the biggest wage gains, including hospitality and leisure. The sector accounts for 10% of total U.S. employment, and its wages are up 17% on an annualized basis over the last three months alone. Wages in the transportation and warehousing sector are up 13%.
Where to go from here
Bank of America notes that the reopening rally kickstarted in November with the election and rollout of the vaccines, sending stocks and credit up big and steepening the yield curve. Next, the inflation boom kickstarted in mid-February with a blowout January U.S. retail sales number, sending commodities up big and yields surging. Long-duration tech cracked, and value replaced growth.
The third phase was the peak growth and policy phase, which started in mid-June due to the hawkish Federal Open Markets Committee meeting. The yield curve collapsed, bonds beat out stocks and commodities, the dollar climbed, and growth defensives beat value cyclicals. Bank of America said the "Taper Games" began earlier this month with substantial progress in payroll and FOMC commentary.
Based on all these events, Bank of America advises investors to own defensive quality in the second half of the year. The firm also prefers long defensives and quality in vaccinated developed markets like the U.S. and the EU and long cyclicals and reopening plays in markets with vaccine upside.