Intermarket relations work until they don’t
Chief Economist & Fund Manager
For the past 40 years we have been conditioned about many different intermarket relations.
For example, we have been told inflation means higher commodity prices. Also, high inflation means higher gold prices, because we have been conditioned that gold is the ultimate inflation hedge.
And while commodities have been elevated this year, it was not because of inflation, but because of a war coupled with supply disturbances relating to the Covid Pandemic.
Gold, which we were told over the past 40 years is an inflation hedge and a safe haven, is not acting as such. In fact, if gold can’t get a bid with the highest inflation data in 40 years, a war, and major supply disturbances, when will it get a bid and rally?
For some reason this time around, intermarket relationships are not going according to plan. Does that mean gold will never rally to $10,000 an ounce as many forecast? I have no idea. Perhaps it will someday, under circumstances that we cannot foresee today.
And in all fairness to intermarket strategists, I think one reason why things are different this time is the very strong dollar. While gold has not rallied in dollars, it is up in most other currencies.
The bottom line is that intermarket relations this time around are acting different than what we have been accustomed to. Whether these relations return to what we have been conditioned to, in the future, is unknown. But what is important to understand is that intermarket relations are a function of market forces and circumstances and are not written in stone. Like history, intermarket relations rhyme during market cycles, but are never the same. Most important of all, Intermarket relations work until they don’t.
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