Goldman Sachs: The market is in a re-inflation mode, continuing to be optimistic about gold!
Goldman Sachs strategists pointed out that positive macroeconomic data and election results have driven the largest monthly re-inflation shift since 2000, with gold and European bonds being favored. Since the end of September, the re-inflation stock basket has risen by about 7%. Goldman Sachs believes that gold is an important geopolitical risk hedging tool and benefits from the Federal Reserve's interest rate cuts and purchases by emerging market central banks. The yield spread between 10-year U.S. Treasury bonds and German bonds has widened, and the S&P 500 index has risen by 4.7%, marking its best weekly gain
According to Goldman Sachs strategists, positive macroeconomic data and election results have jointly driven one of the largest monthly re-inflation shifts in assets since 2000.
They define this re-inflation shift by observing assets related to global economic growth and those related to changes in monetary policy. The firm also has a re-inflation stock basket that has risen about 7% since the end of September, with the highest-weighted stocks including Emcor EME, Uber Technologies UBER, and United Rentals URI.
The strategist team led by Andrea Ferrario at Goldman Sachs stated that over the past 20 years of re-inflation periods, replacing the bond portion of a 60/40 investment portfolio (dividing the portfolio into 60% stocks and 40% bonds) with alternatives has been rewarding. They provided a chart showing what has worked—trend followers have performed particularly well—and they now believe that gold and European bonds may be effective.
“From now on, we remain optimistic about gold allocation, as gold can serve as an important geopolitical risk hedge and gain additional momentum from the Federal Reserve's interest rate cuts and ongoing purchases by emerging market central banks, as well as European bonds, as the divergence in the macro backdrop and potential trade tariffs should support the further widening of the yield spread between U.S. Treasuries and German government bonds,” they said.
Since early October, the gap between 10-year U.S. Treasuries and German government bonds has widened by about 30 basis points.
Since President Trump won the election, gold has retreated from its historical highs.
For stocks, they stated that as long as the rise in U.S. Treasury yields is driven by better economic growth, U.S. stocks should be able to cope with the rise in bond yields. “If real yields start to rise (relative to real GDP growth expectations), or if the pace of rising bond yields is too fast, then the rising bond yields could ultimately become a limiting factor for stocks,” they said.
The S&P 500 index closed near 6000 points last week, up 4.7%, marking its best weekly gain in a year