April 20 report: On April 17, France’s Les Echos website published an article titled “Financial Crisis: What Does the Rise in Gold Prices Foretell?” authored by Alexis Bianforni, Portfolio Manager at LFDE Asset Management. Excerpts from the article are as follows:
　　Gold prices are approaching all-time highs: On April 13, they rose above $2,040 per ounce, nearing the all-time high reached on August 6, 2020, when they hit $2,063. They also came close to this level in March 2022.
　　Indeed, when measured in “real” terms—adjusted for inflation—the current gold price still falls short of its all-time high, as cumulative inflation over the past three years has been quite substantial. Nevertheless, gold has recently shown a clear upward trend, especially when compared to its level at the beginning of 2019, which was below $1,300. This means that the increase exceeds 50%.
　　Meanwhile, the gold price—shaped by the tactical or speculative positions adopted by financiers—is a keen and forward-looking reflection of monetary conditions. Looking back, it has often been seen as a harbinger of crises or significant shifts in monetary policy.
　　For example, in 2008, just before the global financial crisis erupted, gold prices surged sharply at a time when central banks around the world were raising interest rates. In 2011, gold reached a new high of over $1,800 (a figure that would be much higher when adjusted for today’s dollars), effectively serving as a hedge against the decline in the U.S. sovereign credit rating and the eurozone crisis.
　　What does the current surge in gold prices portend? If gold could speak, it would say: “I’m seeing real interest rates fall.” If gold is right, this could mean either that U.S. interest rates remain unchanged while inflation stays high or even rises, or that interest rates will decline significantly—especially if they fall faster than inflation does.
　　Currently, the market is leaning toward the latter scenario. Since several U.S. banks collapsed in March, the market has been forecasting that the Federal Reserve will begin cutting interest rates sharply starting from the second half of 2023. This subtly signals heightened concerns about an economic recession, a sentiment confirmed by the minutes from the Fed’s most recent meeting.
　　Another message that gold might be sending is: “I’m seeing the U.S. dollar decline.” If the U.S. dollar falls, the price of gold—denominated in U.S. dollars—could tend to rise in order to preserve its real value. That’s exactly what’s happening right now: since the last quarter of 2022, the U.S. dollar has been declining relative to a basket of other major world currencies.
　　The reason for this weakness is that the market expects U.S. benchmark interest rates to decline earlier and more sharply than in most other regions. For example, the market unanimously believes that the eurozone will not cut interest rates in 2023, whereas the U.S. is expected to cut rates several times. The same holds true for forecasts regarding the UK and Japan—indeed, the market even anticipates interest-rate hikes in those countries.
　　The last imaginable scenario is: “I’m seeing an American debt crisis.” Whether due to the vulnerability of regional banks or the commercial real estate market—both of which are under pressure from rising interest rates—or a more serious political deadlock over the U.S. debt ceiling, it’s not impossible for America’s credit rating to come into question.
　　We still remember the situation on August 5, 2011, when the U.S. credit rating was downgraded—a bolt from the blue that coincided with the peak of the previous gold bull market. Since 2022, the cost of hedging against a U.S. debt default has been steadily rising.
　　Even though a genuine default seems unimaginable, the tense standoff in Congress over raising the debt ceiling could intensify in the coming months.
　　Our old friend Gold is warning us—let’s heed its words. Fortunately, high-quality assets are not in short supply, but investors must identify them and determine their appropriate prices.