Everyone’s got a different theory for what’s been moving gold prices in recent years. Many attribute it to the Fed’s balance sheet. Some attribute it to the debt ceiling. Others point to ETFs.
In his latest note to clients, Bank of America Merrill Lynch‘s Michael Hartnett points to U.S. home prices, which saw its bottom when gold prices topped.
But the belly of the last deflationary beast was, is and remains real estate. And thus it was the trough in US real estate in late-2011 that has proved the true game-changer for financial markets and the real economy. The trough in real estate instantly caused rotation from safe havens to more leveraged, risky assets, a trend that as been gaining traction for the past year and a half. For example, the peak in gold prices (the world’s favorite “tail risk” hedge), coincided with the trough in US home prices (Chart). Indeed, our private client base has reduced their effective gold holdings by 30% since late-2011.
And in 2013, the momentum in US real estate is causing double-digit house price
gains, investors are reaching for any form of exposure to the asset class (Fannie Mae preferred shares have quadrupled in the past 12 weeks), while gold prices and other safe havens come under further selling pressure (our commodity strategists revised down their 2013 average gold price forecast (to $1,478/oz from $1,680/oz).
Here’s Hartnett’s chart: