db140weekender

Macro

    Jackson Hole - The circularity is amusing. Investors are avidly watching ECB signals for cues on the euro while the central bank’s actions itself are heavily predicated on the currency. This cat and mouse game resumes next week with Mr Draghi’s Jackson Hole speech. The stakes are high. At current euro levels, core inflation normalises by 2020 even if eurozone output growth averages 1.7 per cent over that horizon. However, if the euro appreciates to 1.30 dollars by next year; output growth through to 2020 must be maintained at the current impressive pace of 2.2 per cent, to compensate for the currency’s disinflationary drag. That requires the eurozone growing at twice its trend rate for three more years even though Germany already has a positive output gap. Mr Draghi should choose his words carefully - what happens in Jackson Hole does not stay there.

    Strategy

    Gold - Bond villain Goldfinger’s plot involved a nuclear detonation increasing gold prices tenfold. In real life, last week’s headlines about nuclear missiles moved gold two per cent higher. Indeed, retail investors seem uninterested with negative ETF inflows over the last year and total ETF holdings one-fifth below their 2013 peak. Despite no nuclear explosions, Mr Goldfinger’s prediction proved prescient as gold rocketed tenfold in the 15 years after the movie’s release. Villainous plots aside, what can gold bugs count on today? As a store of value, gold is already 50 per cent higher than inflation since 1971 would suggest. As an asset, gold is one-quarter higher than a time value adjusted S&P 500 would indicate. And as a commodity, gold stands 15 per cent more expensive versus copper. It’s only central bank balance sheets that make gold look one-quarter too cheap.