Coining a phrase from another era, the stock market is in another period of irrational exuberance. 18% of all US dollars in circulation were printed in 2020, a staggering increase in money circulating in the system, with the printing presses yet to slow down in 2021. This massive liquidity infusion from the government’s fiscal stimuli policies coupled with record household borrowing on the back of the low-interest rates has seen the stock market-driven to all-time highs as investors seemingly eschew usual risk considerations and chase returns.
Some tapering of these liquidity measures was expected to have already begun but the continuing pandemic has delayed this by some months and as a result, gold has remained largely range-bound since March 2021. However, signs of inflation are beginning to creep into the system and whilst interest rates will eventually rise, the mountain of debt which has been accumulated may limit the extent to which rate hikes can be used to fight inflation without causing issues for the economic recovery and the debt servicing obligations which both government and individuals have undertaken in record amounts. When interest rates rise, we will also likely see the bursting of the stock bubble and a flight to safety.
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