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Gold Market Overview

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By leaving out weekly fuss, the Gold Market Overview reports enable you to see fundamental changes on the gold market in monthly format. The monthly report reveals what will drive the price of gold in the future and helps you to focus on the most important changes. Market Overview reports will make sure that you don't miss the forest for the trees.

  • Does Debt Matters For Economy and Gold?

    October 23, 2020, 1:58 PM

    The U.S. passed a milestone! The federal debt in private hands surpassed 100 percent of GDP measured quarterly, in the second quarter of 2020. On an annual basis, it would exceed the size of the economy next year, due to a massive fiscal stimulus and a plunge in revenues amid the coronavirus crisis (however, the fiscal deficits and debts were already increasing significantly prior to the outbreak of pandemic). According to the Congressional Budget Office, the fiscal deficit will reach $3.3 trillion in 2020, more than triple the shortfall recorded last year. At 16.0 percent of GDP, the budget deficit would be the largest since the World War II. Is the US waging a war I don’t know about?

    As a consequence of massive fiscal gap, the federal debt held by the public is projected to rise abruptly, from 35 percent in 2007, before the Great Recession, and 79 percent in 2019 to 104.4 percent in 2021 (or $21.9 trillion), and 107 percent in 2023, the highest level in the nation’s history, as the chart below shows. The gross federal debt to GDP, which includes intergovernmental holdings or debt owned by some federal agencies, such as Social Security trust funds, is even higher (it surpassed the economy's size several years ago).

    But does all this debt matter, or should we stop worrying and love the (debt) bomb? You see, some mainstream economists, including the most renowned ones, argue that debt is not a problem in the current world of ultra-low interest rates. As long as the interest rate on government debt is lower than the GDP growth, we can roll over debt, and the debt-to-GDP ratio will slowly decline over time.

    It’s hard to argue with mathematics. However, there are three critical problems here, which are hidden in the beauty of algebra. First, at some point, the public debt begins to drag down economic growth. This is because the current high public debt results from excessive unproductive government spending that extracts resources from the private sector, crowding out more productive spending.

    Second, the current happy environment of ultra-low interest rates may not last forever. It may merely be not scalable. As John Cochrane asks:

    Bond market investors lend 100% of GDP to the US government at 1% interest. Will they lend 200% of GDP at the same low interest rate, or will they start to require higher interest rates?

    In other words, there is a limit of debt, beyond which markets will not lend and we will face a sovereign-debt crisis. This limit may be significantly higher than the current level of debt to GDP, but it exists. And finding this limit will be painful. You see, the debt crisis comes always as a surprise. Lehman Brothers borrowed at low rates until it didn’t. Greece borrowed at low rates until it didn’t.

    The third problem is that we can indeed roll over debt infinitely without destabilizing the debt-to-GDP ratio only when the government runs a primary surplus (revenues are greater than spending excluding debt interest payments), and the budget is structurally balanced. Yes, you guessed – this is not the case. The US government runs primary deficits, adding to the pile of debt, even though bond yields are lower than the GDP growth. Politicians are unable to produce balanced budgets as they want to support current consumption to please the voters.

    Hence, the debt really matters, and it would need to be addressed eventually. How? Painfully. Through financial repression and inflation. That is how the US exited a massive debt-to-GDP ratio from WWII. True, the economic growth was fast, while the government ran primary surpluses for decades. But it’s only part of the story. The other is that interest rates were kept artificially low, while high inflation occurred in the late 1940s and devaluing much debt in the 1970s. Given the current sluggish growth and fiscal irresponsibility, the government will have to rely even more on inflation and financial repression.

    So, the risk of either debt crisis or inflation outbreak to devalue the indebtedness should support the demand for gold as a safe-haven and as an inflation-hedge and, thus, the gold prices. The unpleasant truth is that the world fell into the debt trap – and the longer it sits there, the harder the escape will be. And the larger will be the expansion of the Fed’s balance sheet, due to the monetization of debt, and the more extended period of negative real interest rates, which should be bullish for gold.

    Thank you for reading today’s free analysis. If you enjoyed it, and would you like to know more about the links between the economic outlook, the current (past?) crisis and the gold market, we invite you to read the October Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • Are We Entering Stagflation That Will Boost Gold?

    October 16, 2020, 5:20 AM

    Inflation is back. OK, not inflation, but inflation expectations. As the chart below shows, they plunged during the coronavirus crisis, but they have already recovered. Currently, and based on the inflation-protected Treasury yields, Mr. Market expects that inflation will be, on average, 1.5 percent in the next five years and 1.7 percent in the next ten years.

    Meanwhile, the real bond yields have continued their downward trend. As the chart below shows, the yields of 5 and 10-year Treasury Inflation-Protected Securities plunged from around zero in January to around -1.15 in mid-September.

    Do you already see the implications? Yes, you are right. The charts above show the rebound in inflation expectations and the sharp decline in real interest rates. Such a combination indicates that stagflation is coming. Or, at least, that investors worry about the simultaneous occurrence of stagnation and inflation.

    To understand this better, let’s take a look at the chart below. It presents nominal Treasury bond yields. As you can see, they have remained in a sideways trend since April, even though inflation expectations have rebounded. So, the only reason why nominal interest rates did not increase in tandem with inflation expectations is that the growth expectations have declined. In other words, investors expect both economic slowdown and a rebound in inflation to occur simultaneously, i.e., stagflation.

    These expectations are fueled by the coronavirus crisis and following supply-chain disruptions and shortages, the Fed’s new monetary regime that allows for overshooting the inflation target, and the significant expansion in the public debt and the broad money supply. Driven by the quantitative easing and the increase in bank deposits, the M2 money supply growth pace has increased from about 7 percent before the pandemic to about 24 percent in July, as the chart below shows.

    The unprecedented spike in the broad money supply – and not only in the monetary base controlled by the central bank – is the reason why the coronavirus crisis was more inflationary than the Great Recession, and it can translate into higher price inflation in the future.

    However, the money supply acceleration has been matched by a plunge in the velocity of money or the number of times a dollar is spent in the economy (see the chart below). So maybe there is nothing to worry about?

    Actually, there is! You see, the velocity of money is a vague concept. It is defined as a nominal GDP divided by the money supply. So, it does not have a life of its own, and it is not defined independently of the other terms in the famous equation of exchange: M*V = GDP = P*(real GDP).

    Hence, the velocity of money had to decline simply because the economy shrank, while the money supply expanded during the Great Lockdown (see the chart below). But it means that the money supply has been growing faster than the economy, which is a recipe for inflation, which is described precisely as „too much money chasing too few goods”.

    And please note that in the aftermath of the Great Recession, the ballooning Fed’s balance sheet and monetary base were accompanied by slowing M2 money supply growth. Because of the financial crisis, loan growth declined sharply. In contrast, today, the banking system is in a healthier position, and commercial banks substantially expanded the credit creation.

    Of course, the rise in the broad money supply was partially a result of companies’ drawing down on pre-arranged credit lines, not the irrational exuberance of the commercial banks (although government guarantees make banks to provide loans to many sub-marginal companies), but the end result is the same: the rapid expansion in the bank credit and the broad money supply. As the chart below shows, the total bank credit growth accelerated from about 5.3 at the beginning of the year to 11.3 percent in May. Hence, the risk of inflation is higher than in the aftermath of the economic crisis of 2008. It makes the current macroeconomic environment even better for gold.

    To sum up, although the increase in the mere monetary base does not have to translate into higher inflation, the record fast expansion in the broad money supply is disturbing, and it increases the risk of inflation or stagflation sometime in the future. The supply chain distortions, ballooning federal debt, and more dovish Fed, which is eager to accept inflation above its 2-percent target for some time, also add to this risk. As higher inflation increases the appeal of gold as an inflation hedge, and decreases the real interest rates, the heightened stagflationary risk should support the gold prices.

    Of course, the coronavirus crisis has also resulted in a massive drop in GDP growth and an increase in spare capacity that can keep consumer price inflation low for some time. However, when the economy recovers somewhat, while the large monetary and fiscal stimulus program continues, the broad money supply's unprecedented fast growth could end up being inflationary after a certain lag. When gold sniffs out the smell of inflation, it should shine.

    Thank you for reading today’s free analysis. If you enjoyed it, and would you like to know more about the links between the economic outlook, the current (past?) crisis and the gold market, we invite you to read the October Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • Is Gold Market Going Back Into the 1970s?

    October 9, 2020, 12:52 PM

    They say that time travels are impossible. But we just went back to the 1960s! At least in the field of the monetary policy. And all because of a new Fed’s framework. So, please fasten your seat belts and come with me into the past and present of monetary policy – to determine the future of gold!

    At the end of August 2020, the Fed has modified its Statement on Longer-Run Goals and Monetary Policy Strategy – for the first time since its creation in 2012. As a reminder, the Fed will now target not merely a 2 percent rate of inflation, but an average inflation rate of 2 percent, which allows overshooting after the periods of undershooting. So, the Fed will try to compensate for periods of low inflation with periods of high inflation. Hence, on average, we will see a more accessible monetary policy and higher inflation -Good news for the gold bulls.

    One of the many problems with the Fed’s new regime is that we do not know how long will be the period over which the US central bank will average inflation, or what does it mean that the Fed will tolerate temporaral inflation over 2 percent – it’s not hard to see that practically any policy action could be justified through an appropriate choice of the period’s length.

    The second significant shift within the Fed’s strategy is a different reaction function. So far, the Fed reacted (at least in theory, the practice was a different kettle of fish) symmetrically to both upward and downward deviations from the natural rate of unemployment. When the economy approached full employment, the Fed started its tightening cycle to prevent overheating and the rise of inflation. Now, the US central bank will be informed by assessments of the shortfalls of employment from its maximum level. It means that the Fed learned to stop worrying about overheating and loved the inflation bomb.

    In other words, the US central bank believes now that a robust job market can be sustained without causing an outbreak of inflation, so it will not hike interest rates preemptively, based on the signals coming from the labor market and other segments of the economy, but will wait for inflation to materialize and act only later.

    Such an approach may seem right, especially after several years of low inflation. So why to worry about its rise? Why hike interest rates too early and kill an economic expansion? However, the Fed risks that inflation will get out of control. And that the US central bank would be surprised and its reaction would be delayed. In such a scenario, which is not unprecedented, the Fed will have to tighten its monetary policy to curb inflation aggressively. As a former Fed Chair William McChesney Martin said, the central banker's job is to “take away the punch bowl just as the party gets going.” At some point, the punch bowl has to be taken away, no matter how much the guests object. But the longer the party goes on, and the more drunk participants are, the harder it is to take the vase. If inflation exceeds 2 percent and continues its climbing, the Fed will have to take away the punch bowl very abruptly, much more aggressively than earlier and preemptive actions.

    Sounds familiar to you? Indeed, this is why the Fed’s new monetary regime takes us back to the 1960s and, possibly, to the 1970s. Then as today, policymakers put a high priority on achieving full employment relative to price stability. The Fed mistakenly believed that unemployment's natural rate was lower than it was, so the inflationary pressure was unlikely to emerge. Consequently, the monetary policy was consistently too expansionary, leading to the Great Inflation in the 1970s (see the chart below).

    Please look at the chart again. As one can see, high inflation did not show up overnight. Instead, it began to pick up in the late 1960s, together with massive fiscal deficits (hm… high deficits – don’t they look familiar?) caused by the Vietnam war and “Great Society” programs. But despite the upward trend in inflation since 1965, the Fed remained focused on full employment, believing that inflation would subside, based on an overly optimistic view of the economy’s potential output and natural unemployment rate. As a result, the monetary policy remained overly accommodative, with interest rates too low until Paul Volcker came and hiked the federal funds rate aggressively to almost 20 percent in the early 1980s, as the chart below shows. He did not take away the punch bowl, he broke it with a sledgehammer!

    The Volcker’s aggressive tightening was clearly bad for gold, which entered a bear market. However, the 1970s, when the Fed was behind the inflation curve, was an excellent period for the yellow metal. History never repeats itself, but the Fed’s new strategy increases the risk of replaying the unpleasant past (as well as the increased broad money supply in response to the coronavirus crisis). Even if the 2020s only rhymes with the 1970s, they should still be positive for the gold prices.

    Thank you for reading today’s free analysis. If you enjoyed it, and would you like to know more about the links between the economic outlook, the current (past?) crisis and the gold market, we invite you to read the October Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, and we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • Gold Under Fed's New Monetary Regime

    October 2, 2020, 1:40 PM

    Did you believe that the monetary policy of Ben Bernanke in a response to the Great Recession was extraordinary? Nah, Bernanke was an amateur compared to Jerome Powell. The latter quickly reintroduced ZIRP, implemented unlimited quantitative easing, and provided bailouts to Wall Street - and now he risks higher inflation as a result.

    In August 2020, Federal Reserve Chair Jerome Powell delivered his Jackson Hole speech, unveiling a new monetary framework in the process. He announced a flexible average inflation targeting strategy (FAIT). The new regime implies that when the inflation undershoots its target in one period, the US central bank will try to push inflation above the target in the next period to compensate for the previous shortfalls. In other words, after periods of persistently low inflation, the Fed "will likely aim to achieve an inflation moderately above 2 percent for some time," as said in the amended Statement on Longer-Run Goals and Monetary Policy Strategy.

    In plain English, the Fed announced that it will accept an inflation that is somewhat higher. And that it will not continue its standard approach, in use at least since Paul Volcker, and it will not raise interest rates to curb climbing inflation.

    But shouldn't the central bank rather try to achieve the price stability and protect the society against high inflation? Of course it should. However, the recent years of low inflation persistently below the Fed's target of 2 percent (here I mean low consumer price inflation, and asset price inflation that is significantly higher), which are presented in the chart below, raised doubts in the marketplace about whether the US central bank is able to generate higher inflation at all.

    Hence, the Fed started to fear that it will lose control of inflation expectations which had recently declined (see the chart below). As Powell explained in his speech:

    The persistent undershoot of inflation from our 2 percent longer-run objective is a cause for concern. Many find it counterintuitive that the Fed would want to push up inflation. After all, low and stable inflation is essential for a well-functioning economy. And we are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes. However, inflation that is persistently too low can pose serious risks to the economy. Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.

    This dynamic is a problem because expected inflation feeds directly into the general level of interest rates. Well-anchored inflation expectations are critical for giving the Fed the latitude to support employment when necessary without destabilizing inflation.18 But if inflation expectations fall below our 2 percent objective, interest rates would decline in tandem. In turn, we would have less scope to cut interest rates to boost employment during an economic downturn, further diminishing our capacity to stabilize the economy through cutting interest rates. We have seen this adverse dynamic play out in other major economies around the world and have learned that once it sets in, it can be very difficult to overcome. We want to do what we can to prevent such a dynamic from happening here.

    Thus, the new framework could be viewed as a way to raise inflation expectations and regain control of them by the American central bank.

    The shift to the FAIT is a big move that should be positive in the long run for gold, which is considered an inflation hedge. But, perhaps even more important is the change within the employment side of the Fed's mandate. Under the previous strategy, the maximum employment goal referred to the natural rate of unemployment that would be consistent with stable inflation in the long run. When the Fed expected the unemployment rate to fall below its estimate of the rate of unemployment that would not accelerate inflation, it raised the federal funds rate to prevent the increase in inflation. Under the new regime, the Fed will not hike interest rates preemptively and unless there are visible signs of accelerating inflation. It means that the FOMC will prioritize employment and economic growth over inflation and will not impede recoveries unless the inflation target is severely threatened.

    Hence, both major revisions - in the inflation and employment objectives - are fundamentally positive for the gold prices. It does not, however, mean that we will immediately see double-digit inflation. After all, the Fed could not generate inflation in line with the target, so why it should boost it above the target, even temporarily?

    But the US central bank has given itself room to loosen its monetary policy for years. The interest rates will remain close to zero for longer than it would be appropriate under the old regime, as the Fed will not try any longer raise interest rates to preempt inflation. In other words, the central bank is not likely to hike the federal funds rate until inflation is above 2 percent for some time - according to the recent Fed's dot-plot, this is not going to happen before 2024. Hence, the Fed's new framework implies lower real interest rates - is good news for the precious metals investors.

    And the risk of inflation getting out of control should also support the gold prices. After all, as former Fed Chair William McChesney Martin Jr. said, "the effective time to act against inflationary pressures is when they are in the development stage--before they have become full-blown and the damage has been done". It seems that the Fed has forgotten this truth. Well, those who cannot remember the past are condemned to repeat it. Although this statement has negative connotations, I believe that gold bulls would like to relive the 1970s!

  • Will the Bomb Explode, Igniting Gold?

    September 29, 2020, 9:24 AM

    The bomb can explode one day. And I do not mean here missiles from North Korea, Iran or China. Neither I think about the viral threat - the coronavirus bomb has already blown up in spring, dragging the world into deep economic crisis. I have in mind the U.S. debt bomb. Just take a look at the chart below. As one can see, the public debt has reached 107 percent of the GDP even before the pandemic.

    And it further increased in the second quarter of 2020, possibly even to around 137 percent, according to the U.S. National Debt Clock. Although the surge in the ratio of debt-to-GDP partially resulted from the unprecedented collapse in the economic activity triggered by the epidemic and the Great Lockdown, it was also driven by the vast additional government expenditures. As revenues declined, the fiscal deficit is expected to balloon from $984 billion, or 4.6 percent of GDP, in fiscal year of 2019, to $3.7 trillion, or 17.9 percent of GDP in 2020, according to the CBO. In consequence, the already high public debt is forecasted to increase even more. And Fitch has already downgraded its outlook on the U.S. debt from stable to negative.

    Some economists claim that government stimulus financed by debt was necessary given the disastrous economic effects of the coronavirus crisis. Maybe it was, maybe not (we believe that increased spending on health should be accompanied by spending cuts in other areas) - but one thing is certain. When the battle with Covid-19 will be won (and it will be!), the policymakers will need to detonate the debt bomb.

    There are a few ways to do it. The first is obvious and the less harmful one in the long-run. The government could reduce its excessive spending and, thus, fiscal deficits, stabilizing the ratio of debt to the GDP. Unfortunately, it is the most difficult option from the political point of view, especially when both Trump and Democrats talk about the need of more economic stimulus and higher spending on infrastructure.

    Second, the government could hike taxes to raise more revenues, filling the budget hole. Trump is unlikely to raise taxes, but if Biden wins, higher taxes for the richest are possible. Although they would reduce the fiscal deficits, hiking taxes, especially in the aftermath of the recession, would be harmful for the economic growth.

    All this means that policymakers will be tempted to reduce the public debt through either higher inflation or financial repression. Both ways are supportive for the gold prices.

    Let's start with inflation. Gold is believed to be an inflation hedge, so the increase in inflation - or mere inflation expectations - would increase the demand for gold and its price. Moreover, higher inflation means lower real interest rates - which would also make the yellow metal shine. So, attempts to inflate away the debt would weaken the greenback, lower the already ultra-low real bond yields, and support the gold prices.

    Financial repression is maybe less spectacular but also positive for the yellow metal. It works as follows: the government caps the interest rates that financial institutions are allowed to pay. The idea is simple: thanks to the financial repression, government can borrow cheaper than it could otherwise because people simply are not allowed to get better returns elsewhere. This method wouldn't be unprecedented, as it was used to reduce the high public debt after World War II.

    Oh, by the way, the interest-rate ceilings were lower than the rate of inflation, so creditors received negative returns in real terms. It goes without saying that gold should shine during financial repression. After all, the argument that gold doesn't pay interest would be less convincing in the world where other assets offer scant yields or even negative returns in real terms.

    Yield curve control contemplated by the Fed would be that kind of financial repression, as it would also aim to keep the Treasury yields at sufficiently low level to reduce the debt-to-GDP ratio over time. If implemented - so far the U.S. central bank has not endorsed the idea - it would maintain ultra-low interest rates with all their negative consequences, such as: the prevalence of zombie companies and misallocation of capital, the search for yield and excessive risk-taking, the rise in private indebtedness, etc.

    Moreover, the ultra-low interest rates could lead to capital outflows, which would weaken the U.S. dollar, while strengthening gold. Last but not least, the pledge to keep interest rates at very low level could require the Fed to let inflation turn hot, which would also support the gold prices.

    To sum up, high public debt will be one of the most significant legacies of the coronavirus crisis. The efforts to reduce it will become an important element of the political debate in the upcoming years, as policymakers will realize - sooner or later - that they are sitting on a ticking time bomb. It seems that financial repression will be the preferred method of reducing the high debt-to-GDP ratio, dominating the investment outlook in coming years. Precious metals investors holding gold should benefit from negative real interest rates.

    Thank you for reading today's free analysis. If you enjoyed it, and would you like to know more about the links between the economic outlook, the current (past?) crisis and the gold market, we invite you to read the September Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, and we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • Gold, Dollar and Rates: A Correlated Story

    September 23, 2020, 8:49 AM

    Mining production? No. China's consumer demand? No. The main drivers of gold prices are, as I've repeated many times, the U.S. dollar and real interest rates. You don't believe it? You don't have to - just look at the charts below.

    The first one displays the greenback and the dollar-denominated price of gold. Because other series start much later, I used here the Trade Weighted U.S. Dollar Index against major currencies that circulate widely outside the country of issuance. Although the correlation is not perfect, the inverse relationship is quite strong and bull and bear markets in gold coincide with the bear and bull trends in the U.S. dollar.

    The second chart presents the U.S. real interest rates and the price of gold (London Gold Fix). As the data series for the yields of inflation-indexed Treasuries (which I treat a proxy for real rates) start only in 2003, I use here nominal bond yields adjusted for the CPI. Again, the negative relationship between displayed variables is far from being perfect (actually it is only -0.31), but it is clear that gold rallied the most when the real interest rates were negative.

    Now, let's zoom in and use more recent data. The chart below shows the price of gold and Trade Weighted U.S. Dollar Index against the broad basket of currencies. As the two lines looks like their mirror images, the inverse relationship between the yellow metal and greenback becomes even clearer now.

    Or... does it really? The correlation coefficient is 0.26, so the relationship was positive in the analyzed period! Never trust your eyes, only numbers are real! As one can see in the chart below, the 100-day rolling correlation between gold and the U.S. dollar is quite volatile. Which is not so surprising, when we realize that both the yellow metal and the greenback can serve as safe-haven assets during economic crises. However, the correlation has become more negative recently.

    Similarly, the next chart zooms in on the relationship between gold and real interest rates, using more recent data and yields of TIPS. Again, the inverse, mirror relationship between both variables becomes more than clear. It is obvious at first sight, without any quantitative analyses.

    But never stop at the first impression! The correlation coefficient is -0.85, so it is indeed very strong negative correlation. And in the past 100 days, it was even stronger (-0.95), as the chart below shows. As one can see, correlation is not fixed but it is constantly changing. And gold has become recently even more sensitive to changes in the real interest rates.

    What does it all mean for the gold market? Well, as I have repeated many times, the strong relationships with U.S. dollar and real interest rates stem from the fact that gold is not merely a commodity, but it is a monetary asset. Of course, the international price of gold is quoted in the dollar, so when the value of the greenback increases (decreases) relative to other currencies around the world, the price of gold tends to fall (rise) in the U.S. dollar. However, there is something more to the story. Gold is seen as another currency, or a bet against the greenback and other fiat currencies, so during times of fear, the price of the yellow metal tends to rise as confidence in the Fed (and other central banks), the U.S. government and the current monetary system fails.

    The real interest rates are connected, of course, with the exchange rates. The lower the rates, the weaker the currency is. So, low interest rates tend to weaken the greenback, which also supports gold. Moreover, because the yellow metal does not bear any yield, the low rates reduce the opportunity costs of holding gold compared to other assets. And TIPS are used as protection against inflation, just as gold, so they move together.

    Question: what about when the rates are low, or even negative? When either inflation is high, or when nominal interest rates are close to zero. Both cases mean that economic situation is grave or even that central banks have lost control, which drives investors toward gold.

    Now, the real interest rates are at very low level, so there is a risk of a rebound. However, they were even lower during the 1970s, so the reversal is not certain, especially that the Fed is not even thinking about thinking about hiking the federal funds rate. So, although the U.S. central bank distanced itself somewhat from the idea of yield curve control, the interest rates are likely to remain ultra low for the foreseeable future. Which is great news for gold.

    When it comes to the U.S. dollar, we see that it has peaked recently. It can go, of course, further north, but the current environment of the dovish Fed, negative real interest rates, narrowing divergence between monetary policies conducted by the U.S. and other countries, and soaring fiscal deficits and federal debt are important headwinds for the greenback. We know that other central banks and governments are not much better than their American counterparts, but it seems that more and more people are starting to worry about the soundness of the U.S. dollar (although the greenback, together with gold, still behaves like the safe haven during economic crises). So, more investors could be interested in buying gold, the ultimate currency.

    Thank you for reading today's free analysis. If you enjoyed it, and would you like to know more about the links between the economic outlook, the current (past?) crisis and the gold market, we invite you to read the September Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, and we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • Gold Reaches $2,000 Amid Dollar Depreciation

    September 11, 2020, 8:55 AM

    $2,000. Think about this number. Theoretically, it's just a number, one of many. But... somehow we feel that jumping above this level was a big event in the gold market. After all, gold surpassed this psychologically important point for the first time in history, reaching record high, as the chart below shows.

    How did gold manage to achieve it? The obvious reason is the coronavirus crisis and its economic consequences. But let's be more specific. The first driver was the elevated risk perception spurred by the pandemic and the Great Lockdown, which increased the safe-haven demand for gold.

    The second explanation is the Fed's easy monetary policy. It's true that inflation remains low, but investors should remember that rising goods prices are not the only sign of easy money. The ultra low real interest rates, ballooned Fed's balance sheet with the broad money supply as well, and elevated equity prices - all these factors reflected the Fed's ultra dovish stance, and boosted the gold prices.

    The third reason is the dollar's depreciation. As one can see in the chart below, the greenback lost more than 7 percent in value since its March high, reversing a safe-haven rally amid coronavirus crisis.

    Although the weakening of the U.S. dollar partially reflected the Fed's accommodative stance and the increase in the risk appetite, we should not forget about investors' growing demand for a safe-haven alternative to the dollar. I mean here that the loss of confidence in the U.S. government, Trump's weaponization of the greenback, and trade wars inclined many investors to diversify their investment portfolios. As there is no sensible alternative among other major fiat currencies, some people could switch to gold.

    To be clear, I'm not writing about the demise of the U.S. dollar's, as the reports about its fall are, as always, greatly exaggerated. I'm analyzing here the economic reasons behind the greenback's sharp depreciation - in order to draw investment conclusions for precious metals investors.

    First, the dollar tends to weaken during risk-on episodes, so when market sentiment improved after the worst phase of the coronavirus crisis, the greenback simply corrected after previous gains. Second, the U.S. central bank eased its monetary stance in the response to the economic collapse, slashing interest rates. The lower yields accrued to the dollar-denominated bonds narrowed the divergence in interest rates across the Atlantic (see the chart below), which reduced capital inflows into America and triggered a shift in holdings in favor of other markets.

    Third, the U.S. did a poor job in containing the coronavirus compared to other developed countries, which worsened its economic outlook and made investors expect ultra low interest rates kept by the Fed for longer. Fourth, the U.S. central bank added massive liquidity into financial markets and activated currency swaps with other central banks, increasing the supply of greenbacks. Fifth, the Fed is effectively monetizing massive fiscal deficits, which also leads to large external deficits.

    So, what's next for the dollar and gold? Well, with improving health and economic situation in the U.S., the downward pressure on the greenback should weaken. On the other hand, the adopted ultra dovish stance makes the Fed similar to the ECB and the Bank of Japan, which should maintain the downward pressure on the dollar. In other words, it seems that the U.S. dollar could rally again only if there is another risk-off moment, such as the second wave of infections in Europe or the financial crisis. But gold should move in tandem with the greenback, then.

    Summing up, gold has recently jumped above the psychologically important level of $2,000, while the U.S. dollar depreciated sharply. Some analysts link these two events and claim that the gold's rally was caused by the dollar's depreciation. Although it certainly helped, please note that the greenback lost just about 7 percent, while gold gained about 40 percent since spring. So, it seems that in the current environment of very dovish Fed, ultra low real interest rates, and high public debt, gold can shine even without serious weakness in the dollar.

    That's great - but even greater is the fact that it is likely that the greenback started a cyclical decline in spring amid the banana-republic-style money creation and debt monetization by the Fed. There could be a rebound in the short-term (for example, because of negative economic data out of the Eurozone economy), but I wouldn't be surprised if the U.S. dollar would be next year below the current levels. It goes without saying that gold would benefit from further potential depreciation of the greenback.

    Thank you for reading today's free analysis. If you enjoyed it, and would you like to know more about the links between the economic outlook, the current (past?) crisis and the gold market, we invite you to read the September Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, and we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • Gold Bull Markets: History and Prospects Ahead

    September 4, 2020, 6:19 AM

    Would you like to know one simple way of achieving investment successes and getting rich? That's great, I will reveal this secret to you - and you even don't have to click anything! The trick is to find a bull market and go long! And, what a coincidence, gold is right now in the bull market... If you don't believe, then look at the chart below.

    If the chart does not present the bull market then I have no idea either what it presents or what is the bull market. As you can see, gold gained about $800, or two thirds, since the autumn of 2018, which seems to be quite bullish!

    Of course, you can argue that the bull market started earlier, in December 2015, when the price of the yellow metal reached the bottom of $1,049, as the chart below shows. You would be theoretically right, but from the practical point of view, gold entered a sideways trend until late 2018, and since then (and since surpassing the upside barrier of $1,400 in mid-2019) the trend has been clearly rising.

    And in July 2020, the price of gold has surpassed its previous record high, strengthening the bullish case for gold. Now, the question is not whether we are in the bull market, but what will this bull market be like, how long is it going to last, and what level will gold reach?

    Although the sample is terribly small, it's always good to look at previous bull markets in gold. The first one occurred in the 1970s, when President Nixon ended the gold standard, while fiscal deficits and inflation moved out of control. In consequence, as one can see in the chart below, the price of gold skyrocketed from about $35 to $850, or more than 2,300 percent!

    The second gold's bull market happened in the 2000s, when President Bush's policies weakened the U.S. dollar, while the Great Recession and the introduced quantitative easing in response scarred investors and spurred inflation expectations. As the chart below shows, the price of gold soared from about $255 to $1,895, or more than 640 percent!

    What does this brief analysis imply for gold? Well, so far gold gained about 85 percent since the bottom, so there is room for further gains. Of course, it's highly unlikely that gold will skyrocket as strongly as in the 1970s, because its price was much lower and the current international monetary system was in its infancy after the end of the Breton Woods and the closure of the gold window. Neither the gains similar to those from the 2000s are probable, as the unconventional monetary policy with quantitative easing has become totally conventional monetary policy, which does not trigger such worries as back then.

    But there is definitely more upside potential for gold. Remember that previous bull markets lasted for a decade each. Even if we accept December 2015, instead of late 2018, as the starting point of the current bull market, there are still a few bullish years ahead of us.

    What else can we learn from the previous bull markets? First, let's take a look at the charts above once again. As you can see, gold started timidly each time, then it accelerated, just to soar at the very end of each phase of the bull market. If history repeats, we are in a correction period and gold will not rally further unless it consolidates somewhat.

    And this is another lesson: bull markets are never linear, but they consist of ups and downs, as the recent correction clearly shows. Just as the gold market in general, as the chart below presents.

    Second, there are many similarities between previous bull markets and the current one. In particular, the fiscal policy is lax and budget deficits are ballooning, while the money supply is soaring. The Fed's balance sheet skyrocketed. The only component of former gold's bull markets we lack, is the secular bear market in the U.S. dollar. But given the massive government spending, high level of federal debt, and the policy of zero interest rates, this can change at some point, if it hasn't changed already...

    Third, the new decade we are entering, could be more similar to the 1970s than to the 2000s. We mean here the fact that the current economic crisis is already less deflationary and more inflationary than the global financial crisis. Inflation is low, but it is positive. Meanwhile, interest rates are below the inflation rate, which implies negative real interest rates, the rocket fuel for gold.

  • U.S. Presidential Elections Are Coming: Should We Vote for Gold?

    August 28, 2020, 5:13 AM

    Over the past few months, we have focused - for obvious reasons - on the pandemic and the following economic crisis. However, there are also other important developments happening in the background, apart from media attention that still focuses on the coronavirus. As they can substantially affect the gold prices, precious metals investors should be aware of them.

    One of the most important of such issues is the U.S. presidential election that is approaching fast. And the polls suggest that we could see the change of the President in the White House. As the chart below shows, Joe Biden (blue line) has an average polling margin of 9 percent over incumbent President Donald Trump (red line).

    Will Biden win? That's a great question. Polls say so, but who trusts polls these days? We believe that it is certainly possible, given that some voters could be dissatisfied with Trump administration's handling of the epidemic, and especially if the second wave of the coronavirus is not contained quickly and the double-dip recession arrives. Trump could share then the fate of George H.W. Bush, who lost to Bill Clinton amid the early 1990s recession following jobless recovery. However, if the economy improves, the race could tighten between now and election day.

    What would President Biden imply for the US economy and the gold market? Well, although I don't support Trump's trade policy, I'm neither impressed with Biden's economic agenda. Under his economic revival plan, the federal government would spend $700 billion on research and development for new technologies and energy initiative and on American goods and services. What is key here is that Biden plans to pay for these and other programs by raising taxes "on corporations and the wealthy". In particular, he wants to hike the corporate tax rate from the current 21 to 28 percent. I can be wrong, but Wall Street would not welcome lifting taxes, especially during the fragile recovery from the economic crisis. So, the stock market could tank, if Biden wins.

    But it does not have to... So far, investors are totally unfazed by the polls giving Biden higher chances. After all, still a lot can happen before November, so the markets can be waiting until the outcome of the presidential race looks more certain. It's also possible that investors expect that Biden would moderate his proposals after elections or that they focus more on other parts of Biden's agenda. For instance, Biden's trade policy is less protectionist than Trump's and he could end the trade wars with China (and other countries) that worried the markets so much last year.

    Hence, the possible effect of Biden's triumph on equities and gold market is ambiguous. Theoretically, given that the stock market rallied, while the price of the yellow metal plunged, after Trump's victory in 2016 (see the chart below), we should expect the reverse if Trump loses.

    But it should be too simplistic reasoning and both the stock and gold market could easily interpret Biden's possible victory in a bullish manner, as investors tend to do during bull markets. Or, after an initial, short-term volatility, the underlying upward trends could resume. After all, Biden is generally acceptable to the investors. He is not as radical as Bernie Sanders or Elizabeth Warren. He is actually more mainstream in several aspects than Trump. And the financial markets managed to operate or even thrive under both Trump and Obama, whose vice-president was Biden.

    In other words, no matter who will reside in the White House, the current macroeconomic conditions should remain generally favorably for the precious metals. We mean here the environment of the soaring fiscal deficits (according to the CBO, the federal budget deficit was $2.7 trillion in the first nine months of fiscal year 2020, $2.0 trillion more than the deficit recorded during the same period last year!) and federal debt (according to the IMF, general government debt is expected to rise to 160 percent of GDP by 2030 even without further rounds of fiscal stimulus!), as well as negative real interest rates, and the fastest pace of growth in the money supply in the modern history, as the chart below shows.

    Moreover, no matter who wins, we do not expect radical changes in the accommodative fiscal and monetary policies, and the overall macroeconomic outlook, until the economy fully recovers from the coronavirus crisis. Investors should remember that although politics is important, what the Fed does is also, if not more, important for the stock and gold markets - and the U.S. central bank will not abandon its dovish bias, no matter who would reside in the White House. Neither Trump nor Biden would give up extravagant government spending and stimulus packages. If there is no difference, maybe we should vote for gold?

    Thank you for reading today's free analysis. If you enjoyed it, and would you like to know more about the links between the economic outlook, the current (past?) crisis and the gold market, we invite you to read the August Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, and we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • Fed Can Control Yield Curve. But It Can't Control Gold

    August 21, 2020, 4:40 AM

    In a response to the coronavirus crisis, the Fed has already cut interest rates to zero and implemented quantitative easing. But that's not enough and the U.S. central bankers are now talking about "yield curve control". What is it and how it could affect the gold market?

    Normally, the central banks lower the short-term interest rate to stimulate the economy. But the federal funds rate is already at zero, so the Fed now thinks about the yield curve control. It works basically like normal open-market operations - the only difference is that under the yield curve control, the Fed would target some longer-term interest rate. As the central bank would set the short-term rates at zero and it would target also longer-term rates, it would practically control the yield curve, which explains the name. Moreover, the Fed would also promise to buy enough bonds to keep the rate from moving above the target - this is why the yield curve control is also called "interest rate caps" or "interest rate pegs".

    It might be useful to compare the yield curve control with the quantitative easing. While the latter deals with quantities or amounts of bonds (e.g., the Fed commits to buying bonds worth $1 trillion, but the market still influences the price), the former deals with bond prices. In other words, under the yield curve control, the central banks pledge to buy whatever amount of bonds the market wants to supply at the target price (instead of a particular amount of bonds at whatever the price).

    Although central banks normally target short-term interest rates, the yield curve control would not be a new policy. It was already used by the Fed during and after the World War II, when it agreed to help Treasury in financing military expenditures and cap the Treasury yields by buying any Treasury bond that yielded above the target. In a more recent history, the Bank of Japan introduced its yield curve control in September 2016, pegging yields on 10-year Japanese Treasuries around zero percent. Interestingly, under the yield curve target, the BoJ has been buying government bonds at a slower pace than under the QE, as the chart below shows. This is because investors accepted that the BoJ would buy whatever quantity of bonds to keep yields from rising, so it has not had to buy too many of them to set price.

    And in March 2020, in response to Covid-19 pandemic and the following economic crisis, the Australia's central bank started capping yields on 3-year government bonds at 0.25 percent, which triggered expectations that the Fed could follow suit.

    What would the yield curve target imply for the monetary policy, economy and the gold market? Well, it's not rocket science - capping bond yields means that bond yields will remain very low for longer that they would be without the caps. Importantly - oh, what a coincidence! - the Fed would cap Treasury yields, which would allow the government to continue its spending spree and to not worry about the fiscal deficits and soaring public debt.

    Another issue is that the yield curve control flattens the yield curve, which hurts the commercial banks, which usually borrow short-term funds and lend long-term. So, a flat yield curve narrows their margins, impairing their lending ability, which is key to revive the economy.

    Last but not least, the yield curve control can become very easily (if it's not already) a blunt tool to help government issue debt smoothly and cheaply. As the FOMC admitted itself in minutes of its recent meeting, "monetary policy goals might come in conflict with public debt management goals, which could pose risks to the independence of the central bank."

    It should be clear now that the yield curve control should be positive for the gold prices, even if it would reduce the pace of the Fed's balance sheet expansion (as in the case of the BoJ's experience). After all, the caps on the Treasury yields imply low interest rates. Importantly, if inflation rises the cap on nominal interest rates would lead to the decline in the real interest rates, as it happened in the aftermath of the World War II. The yield curve control also caps the government's borrowing costs, which encourage the increase in public debt, which raises the risk of the sovereign-debt crisis. Moreover, the yield curve control could spur some worries about the central bank's independence, which could weaken the U.S. dollar. In such a macroeconomic environment, gold should shine. So, the Fed could cap the Treasury yields, while pushing gold upwards.

    Thank you for reading today's free analysis. If you enjoyed it, and would you like to know more about the links between the economic outlook, the current (past?) crisis and the gold market, we invite you to read the August Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, and we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • Five Post-Covid Trends and Gold

    August 14, 2020, 5:35 AM

    The disruptions caused by the pandemic of Covid-19 forced people, companies, governments, and organizations to challenge their basis assumptions about their ways of life and conduct. Some of them might be trivial such as more frequent and thorough hand-washing, but others are much more important, amongst them putting more emphasis on health that came suddenly under threat and social relationships that were so missing during the quarantine. So, the key question is when the epidemic is fully contained, what will be the "new normal" - and how it will affect the gold market?

    The first characteristic feature of the post-pandemic world will be more people working and getting things done from home. The digital transformation has already started before the coronavirus jumped on human beings, but the Covid-19 epidemic has accelerated its pace, with further expansion in videoconferencing, online teaching, e-commerce, telemedicine, and fintech. After all these long years, it turned out that all these boring meetings really could have been e-mails or chats via Zoom, Skype or Teams. What does it mean for the economy and society? Well, working from home implies more flexibility and less commuting for the employees. So, they can work from any location and spend more time with their families. Improved work-life balance translates into happier workers, which can make them more productive. And the most important thing: people can work in sweatpants or pyjamas all day, hurray! There are also benefits for the companies - just think about all the cost savings from less space needed and less business travels! Hence, although working from home has also some negatives (possible miscommunication, loneliness, and difficulties with unplugging after work, decreased knowledge flows and managerial oversight), it should increase productivity in the long-run, especially if not overdone. Improved productivity thanks to telework is positive for the corporate margins and equities, but it is bad news for the gold prices.

    Second important trend is deglobalization. The pandemic showed that just-in-time supply chains relying on foreign suppliers are not resilient in times of global crises and border closures. So, many Western companies will re-shore some of their production, or reallocate it closer to their major markets in ways that favor national and regional supply chains. The growth of nationalism will counteract the first change and hamper the productivity growth, which is positive for the yellow metal. However, making the supply chains and manufacturing more resilient diminishes the long run threats to the economies and the risk of economic collapse, which could reduce the safe-haven demand for gold.

    Third, the pandemic will affect the geopolitics. For example, it can aggravate the fragile trade relations between China and the United States. Moreover, the epidemic and the following economic crisis make more and more people question the liberal internationalism and America's leadership role. On the contrary, China's geopolitical role could increase in the aftermath of the pandemic. The rising geopolitical tensions and protectionism, as well as diminished confidence in the U.S. global leadership and the greenback could increase the appeal of gold.

    Fourth, could be a shift toward lower population density and less crowded places. It may lead to a complete rethinking or redesigning of living in big cities - or a move from metropolises to smaller cities, towns or even to the villages. After all, when people need only Wi-Fi to work or educate, they don't have to live in big cities anymore. The consequences are not clear, but it's possible that the real estate prices in the biggest cities could correct somewhat, as people and companies could cut costs and move away from high-priced, centrally located areas (however, there might be higher demand for larger houses with offices for telework). If we really see such a correction, the repercussions may be significant, also for the gold market, as the burst of the 2000s' housing bubble demonstrated. As the chart below shows, the S&P/Case-Shiller U.S. National Home Price Index is now much higher than in 2007, before the global financial crisis started.

    Last but not least, the role of governments will increase in the post-pandemic world after generously supporting companies and households during the crisis. Compared to the Great Recession, when both the Fed and the Treasury acted more gradually and with some fear of public anger, their recent actions were unprecedentedly swift and aggressive. Hence, the public debt will balloon all around the world, creating significant challenges, increasing the risk of sovereign-debt crisis and putting more downward pressure on the central banks to maintain the dovish monetary policy with ultra-low interest rates. This important macroeconomic trend should be positive for gold.

    Thank you for reading today's free analysis. If you enjoyed it, and would you like to know more about the links between the economic outlook, the current (past?) crisis and the gold market, we invite you to read the August Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, and we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • How Does the Yellow Metal Fit the Corona World?

    August 7, 2020, 6:46 AM

    For a long time, pundits talked excitedly about the rapid, V-shaped recovery. I never shared this view, finding it too optimistic and without basis in reality. Like Jeff Goldblum in Jurassic Park, I hate being right all the time, but it really seems that I was right about this issue. According to the July World Flash report by IHS Markit, we can read that "the new wave of infections has reduced the probability of a V-shaped cycle (...) and increased the risk of a double-dip recession (W-shaped cycle)."

    The problem is the rising number of Covid-19 infections in large economies such as Brazil, India, or the United States, as the chart below shows (there is also the resurgence in cases in other countries, such as Australia or Japan, although the absolute numbers of infections are smaller).

    In particular, the second wave of infections in America is especially disturbing, as the U.S. economy accounts for about a quarter of world's GDP. Given that when the U.S. sneezes, the world catches a cold, just think what could happen when it suffers from Covid-19! You see, American consumers remain cautious and reduce their social activity and spending. The states are also reimposing social distancing measures and sanitary restrictions which will additionally hamper the pace of economic recovery in the short-term.

    Last but not least, the uncertain epidemiological and economic situation put many firms in a survival mode. Without confidence in future profitability, companies reduced radically their investment spending. Importantly, business owners remain cautious not only in the U.S. where the number of infections is rising, but also in China, where the epidemic is more less contained, which suggests that the pandemic will leave lasting scars on the American economy, even if the second wave goes away.

    And it goes away for sure. As companies test their workers and states finally mandated the wearing of masks and extended or reintroduced social distancing measures, the trend in the number of daily new infections of coronavirus may change within weeks. So, without the new Great Lockdown and with better social distancing measures and overall preparation to handle the epidemic, the second dip in the possible W-shaped recession would not be anywhere near as severe as the first crash. In other words, the worst is probably behind us, at least unless a financial crisis breaks out.

    What does it all mean for the gold market? Well, the fragile, W-shaped recovery is, of course, a better scenario for gold than a quick, V-shaped recovery. It means slower economic growth and longer recession, which would force central banks and governments to expand and extend their dovish stance and to provide the economy with additional rounds of stimulus. Music to gold's ears!

    Sure, the worst is probably behind us. The improved virus management measures mean that we can contain the second wave of infection without the necessity of introducing the widespread lockdowns. And the health systems expand testing, while encouraging news on the drugs and vaccines will probably keep pouring in, maintaining - together with the massive liquidity provided eagerly by the Fed - the optimism in the financial markets. It could support the risky assets, putting a downward pressure on safe havens such as gold.

    However, the yellow metal may shine even if the second wave is quickly contained while the second leg of recession is much shorter. After all, although the economy might have already bottomed out, it will not return to the pre-epidemic level until 2022. Hence, forget about the V-shaped rebound - the economic recovery could look more like W or like the Nike's swoosh (after an initial vivid rebound due to the low base, the recovery will be slow over the next few quarters). In any case, it could be rather a long and bumpy road with several downside risks. In particular, when firms exhaust their cash buffers, bankruptcies will become more common. It will be a big test for the financial sector.

    Although banks seem to be well-prepared, it might turn out to be an illusion when the black swan lands. It is worth remembering that the crisis will substantially increase the volume of banks' non-performing loans, and that not all banks will cope with the digitalization of the sector and with the competition from the fintech. Moreover, the true impact of the pandemic will not be seen until all the economic stimuli end. So far, everything seems to be under control, but all this liquidity pumped to the financial system by the Fed and Treasury, could cover cracks in the financial system. If they are revealed, gold may get additional boost. However, even without the next crisis, the yellow metal should thrive in the current macroeconomic environment of dovish central banks, low real interest rates, high public debts, and uncertain economic outlook.

  • Gold Looks Beyond the Recovery

    July 24, 2020, 6:16 AM

    The coronavirus recession was shockingly big and swift, but also very short. The global economy has probably started to grow again in May, which was welcomed by the stock market investors. They perceive the crisis as an accident at work or completely external shock. However, the unpleasant truth is that even without the global epidemic, major economic would probably have entered recession. As we wrote earlier, Germany, Italy and Japan were already in recessions or in flirt with the recession before the pandemic. The American economy was in better shape, but the yield curve inverted and the real US GDP has been slowing down in 2019 compared to 2018, as the chart below shows.

    It means that even if the economy recovers relatively quickly, it does not have to flourish and grow at a satisfactory pace. After all, when you start with the very low base, the reported numbers will always look rosy.

    But the real question is what will happen when the economy will shake off from the coronavirus infection and the Great Lockdown. We bet that the economy will slow down relative to the pre-pandemic rate of growth because of the subdued demand, reduced labor supply, weak trade growth, and reconfiguration of the supply chains. Importantly, the world's merchandise trade volume, which normally rises significantly faster that the rate of the increase in GDP, last year declined by 0.1 percent. Such decreases are very rare, two others accompanied the deep recession of 1982 and the Great Recession of 2009. And this year may be even worse, as the world merchandise trade could plummet between 13 and 32 percent this year, because of the coronavirus.

    Moreover, the collapse of the supply chains during the pandemic is likely to cause the return of protectionism and an increase in trade barriers. The supply chains will probably become shorter to increase their resilience, but also more expensive. What is here important is that given that globalism was deflationary, so its retreat should be inflationary, at least relatively, which is good news for gold, considered to be an inflation hedge.

    The subdued pace of economic growth should also be supportive for the gold prices. Importantly, it won't be the only positive developments that the pandemic triggered. Another will be the monetary U-turn. The normalization of monetary policy ended in 2019, even before the global epidemic. So it completely failed. And now, in the aftermath of the coronavirus recession, it is off the table for years, as the quantitative easing is the new normal. The monetary U-turn has a few significant implications. First of all, it means the expansion of the Fed's balance sheet and the broad money supply, as the chart below shows. It could at some point hit the confidence in the monetary system based on fiat currencies and the US dollar. The fact that "money printer goes brrr" (as the popular memes picture it) makes also the inflationary or stagflationary scenario more probable.

    Moreover, the monetary about-face and the Zero Interest Rate Policy created the environment of negative real interest rates, which should also be supportive for the gold prices. Additionally, the ultra dovish Fed significantly reduced the divergence in the monetary policies and in interest rates between the areas of the US dollar and the euro (or Japanese yen), which should weaken the greenback, while supporting the gold prices.

    What is crucial is that the very dovish monetary policy has been accompanied by a similarly expansive fiscal policy. The Congressional Budget Office estimates that the American budget deficit will be $3.7 trillion in the fiscal year of 2020, or 17.9 percent of GDP in 2020, compared with "only" 4.6 percent in 2019, while the federal debt is projected to be 101 percent, versus 79 percent in 2019, a huge increase. The ballooning public debt undermines the independence of the central banks (as it makes the normalization of the monetary policy more difficult), increases the odds of falling into the debt trap, and lowers the resilience of the global economic system.

    If this all sounds bullish for gold prices to you, you are right. The stock market investors look beyond the valley of recession, but the precious metals investors should adopt even more long-term orientation and look beyond the nearest quarters. The legacy of the coronavirus crisis will be subdued economic growth, ultra-easy monetary and fiscal policies, and negative real interest rates. These factors are likely to support the gold prices, although there will be both ups and down on the way.

    Thank you for reading today's free analysis. If you enjoyed it, and would you like to know more about the links between the economic outlook, the current (past?) crisis and the gold market, we invite you to read the June Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, and we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • Gold During Coronavirus Recession and Beyond

    July 17, 2020, 9:56 AM

    It's official now! On June 8, the Business Cycle Dating Committee of the National Bureau of Economic Research stated that economic activity in the United States had peaked in February 2020 (and in Q4 2019, when it comes to the peak in quarterly economic activity), marking the start of a recession. The peak also designates the end of the expansion that began in June 2009 and lasted 128 months, the longest in the history of business cycles dating back to 1854.

    How did gold behave during the last U.S. economic expansion? Let's look at the chart below. As one can see, a lot happened in the gold market during 2009-2020 period. Initially, the yellow metal rallied until 2011, doubling its price from about $900 to $1,900 in September 2011.

    Then, gold lost almost half of its value in five years, bottoming out at about $1,000 in December 2015. For a couple of years, gold could not break the resistance at about $1,380 and was trading sideways. However, in 2019 we finally saw a strong bullish run, with gold rallying above $1,400 in June and even $1,500 in August.

    What can we learn from the past gold's behavior? The first lesson is that gold can rally during economic expansion, not only during recessions or economic crises. This is great news for the yellow metal, as it implies that the recovery from the coronavirus recession won't necessarily end the gold's bull market.

    The second insight is that gold performed the best at the beginning and at the end of the expansion. It makes sense, as the last phase of expansion is already shaky and everyone worries about the recession. Indeed, in 2019, when gold entered the bull market, the U.S. economy has slowed down, while the yield curve has inverted and many market participants have already started to expect the recession.

    And the initial phase of the expansion is also rather fragile and still full of uncertainty. To a large extent, the recovery in the aftermath of the Lehman Brothers' bankruptcy was driven by the easy unconventional monetary policy (quantitative easing and the ZIRP) and expansionary fiscal policy with rising federal debt. In other words, the rebound was created but not without the costs. The recovery was spurred by easy monetary and fiscal policies with significant side effects that gold reacted to.

    The fact that the initial phase of 2009-2020 expansion was very positive for the gold bulls is another great news for them. It implies that the rebound from the 2020 recession not only does not have to be bad for the gold prices, but it can actually push them higher. This is why the Goldman Sachs has recently raised its 12-month forecast for gold to $2,000 - the lower interest rates and inflation worries tend to support the gold prices in this stage of economic recovery. Moreover, just as in 2008-2009, recession was constrained by the very aggressive, easy monetary policy and the ballooning of the fiscal deficit. So far, nobody worries about the negative real interest rates and high indebtedness, but they will one day.

    And the unfolding recovery may be slower than many people expect and weaker than in the past. You see, in the aftermath of the Great Recession, there was a rapid rebound of global value chains, which was a major driver of productivity growth. But now we have still broken supply relationships and decline in world's trade volume, so the recovery might be sluggish and the trend of the GDP growth may not return to the pre-pandemic trajectory.

    In other words, investors could focus too much on the upcoming recovery. Yes, the GDP growth in the third quarter may be spectacular (the CBO expects a rebound of 5.4 percent), but the truth is that the GDP will still be below the pre-pandemic level. What is important is what will happen after the third quarter. Many analysts expect that the U.S. economy will return to normal growth, if not on its own, then aided by monetary and fiscal stimulus. However, given high household debt and corporate debt and reduced demand for many non-essential goods and services, these hopes might be delusional. People can differentiate between "needs" and "wants" and they reduce spending on travels and eating out. They will repay the debts and save more. Some businesses will not reopen and many people will not re-enter the labor market or find a new job quickly (especially that companies learnt during pandemic to do more with fewer people). Moreover, although the U.S. dollar reaffirmed its status as the safe-haven currency, the post-pandemic pile of public debt combined with Trump's nationalistic approach could weaken the greenback.

    Hence, although gold may struggle a bit during the third quarter, which could be full of spectacularly positive economic news, it could appreciate later during the initial phase of a new economic expansion.

    Thank you for reading today's free analysis. If you enjoyed it, and would you like to know more about the links between the economic outlook, the current (past?) crisis and the gold market, we invite you to read the June Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, and we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • Gold Amid Epidemiological and Economical Update

    July 10, 2020, 5:15 AM

    Sometimes when we observe people on the streets, when we see crowded restaurants and pubs, it seems like the pandemic has ended. But is the global epidemic really over? Not at all. Please look at the chart below. As one can see, the daily number of confirmed cases of COVID-19 in the world is still in an upward trend.

    However, in the developed countries the number of daily new cases has declined and stabilized at very low levels, as one can see in the chart below. So, although the pandemic is not over, it has been contained in the West. And remember that global capital markets focus on developments in major economies and financial centers, which are precisely rich countries.

    The only possible exception is the U.S., where the number of new cases has also peaked, but it stabilized at not so low level, as the chart below shows. Actually, the number of new cases is at level from the turn of March and April - and it has been even rising recently.

    However, people's reaction is different. So, although the pandemic is not over, the fear is over. At the beginning of the epidemic, people panicked (rightly or not), but after two months in quarantine, they got used to the new epidemiological situation. After all, the virus has not mutated (so far), the healthcare systems have not collapsed (luckily and partially thanks to the adopted containment measures), the mortality rates have not surged, and the world has not ended. People quickly adapted to new circumstances and they learnt how to live with the coronavirus threat.

    This is very important as markets are driven not by facts and the number of daily new cases of Covid-19, but by people's emotions and reactions to these facts and to the epidemiological threat. And now it seems that many people stopped to fret about the coronavirus.

    Rightly or not. We mean here that there are some important arguments for not worrying and be optimistic about the epidemic. The worst is probably behind us and we are now better prepared to handle the pandemic (the shortages of equipment have been remedied). Moreover, in June, the scientists at Oxford University in the United Kingdom reported that the dexamethasone could be the first drug able to save the lives of Covid-19 patients (however, the study results were presented only in press release without any scientific paper).

    On the other hand, the threat of the resurgence of the coronavirus is real. Many American states noted a record number of new cases (or new hospitalizations) of coronavirus in June, and Florida could be the next epicenter of the pandemic.

    Meanwhile, on the other side of the Pacific, China faces the new coronavirus outbreak in Beijing. In consequence, several communities in the Chinese capital are back on lockdown. The surge in new cases in Beijing, and in other Asian cities (like Tokyo) or American states, is a clear warning to the U.S. and other Western countries: the second wave is possible.

    This is, of course, positive for the gold market, as the risk of resurgence of the coronavirus and the reintroduction of the economic lockdowns supports the safe-haven demand for gold and its prices. However, investors should remember that the number of new cases within the second waves are so far limited. The autumn wave could be worse, but the situation is not out of control yet (and wearing masks can help reduce the size of a possible second wave of infection). And the key issue is that even the second wave will not trigger rally in the gold market, unless it spurs fear in the marketplace and it diminishes confidence in the US economy.

    So far, the market is not worried about a large outbreak in the fall. It seems that investors believe that there will by the fall enough testing, contact tracing, drugs and R&D on vaccines. And that we will not shut down economies as deeply as we did in spring, if there is the second major outbreak in fall. This time the market might be right - however, at the beginning of the year, Mr. Market was clearly too optimistic, so correction in the risky asset markets is possible at some point this year.

    Luckily, the bullish perspective for gold does not depend solely on the second wave. After all, the price of gold has not collapsed amid the optimism about the end of epidemic and economic revival. The key is what the Fed has recently said: it would take nearly two years to fully recover from the coronavirus recession. The subdued economic growth, the dovish U.S. central bank and ultra low real interest rates should support the gold prices (unless they surge suddenly).

    Thank you for reading today's free analysis. If you enjoyed it, and would you like to know more about the links between the economic outlook, the current (past?) crisis and the gold market, we invite you to read the June Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, and we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • High Premiums in Physical Gold Market: Scam or Supply Crisis?

    June 26, 2020, 8:45 AM

    During the coronavirus crisis many people couldn't find physical gold, as there was a bullion shortage at dealerships. And these lucky individuals who managed to obtain bullion had to pay high premiums. We invite you to read our today's article about the high premiums in physical gold market during the pandemic and find out whether they were indicated scam or supply crisis.

    Gold is expected to serve as a safe-haven asset. But during the coronavirus crisis many people couldn't find physical gold, as there was a bullion shortage at dealerships. And these lucky individuals who managed to obtain bullion had to pay high premiums. What a safe haven that people can't find? And does not the price divergence between physical and paper gold show the price manipulation in the latter market? Let's analyze what really happened in the bullion market during the coronavirus crisis.

    First of all, gold was perceived as a safe haven - and this is why it was in such high demand. Since the dawn of civilization, people turn to gold to protect their savings when they are worried about the future. The yellow metal was demonetized in 1971 when President Nixon closed the gold window, ending the gold standard, but gold never lost its position as a store of value. It should not be surprising, as gold was used as money for thousands of years and it has no counterparty risk.

    However, that high demand did not meet with sufficiently increased supply. You see, the coronavirus crisis is both the negative demand and supply shock. Many supply chains were broken. The quarantine, labor absenteeism, travel limitations and other measures undertaken to prevent the spread of the coronavirus disrupted the normal, smooth functioning of the economic engine. And it applies to the mints and refiners which simply could not work at full capacity. The bullion coin you see in the retail store is a highly sophisticated product which had to be earlier minted, refined and transported, which can be logistically challenging even in normal times, but it became really difficult during the Great Lockdown.

    This is the reason behind the supply shortage and high premiums. They do not necessarily prove manipulation in the paper gold market. Rather, refineries and mints stopped operating or capped production because of the collapse in global travel and shutdowns of local economies. Remember that three important gold retailers - Valcambi, Pamp and Argor-Heraeus - are all based in the Swiss region of Ticino, near the border with Italy, that was quickly shut down at the beginning of the current pandemic.

    Investors should remember two things here. First, there is always a certain premium on retail gold, as bullion dealers live on these premiums. One cannot have "spot gold", so if somebody wants to own physical gold, he or she has to pay premium. After all, small and beautiful bullion coins or bars add some value and there are costs involved in producing them. Yes, during the coronavirus crisis these premiums soared, sometimes to 10-15 percent or even more over spot prices. But the havoc was unique: exploding demand and disrupted production and distribution chain at the same time.

    Second, the markets are not homogenous, but heterogeneous - they are many segments on each market. Just as there is no single labor markets, but many labor markets (one for IT specialists, another for waiters, etc.), there is no single gold market. So, prices in these markets may differ, which is pretty normal (you don't expect that the salary of IT specialists will be equal to waiters' pay, do you?). After all, the LBMA Gold Price is a snapshot of gold prices quoted by traders in the London OTC spot market for wholesale transactions (and spot price might be even something else, as it is derived from the futures prices quoted in Comex), while the price offered by bullion dealers is the market price of physical bullion in retail trade.

    Hence, there might be plenty of gold in a big trading hub like London, as there might be more sellers in the institutional market during the asset selloffs. And big fish typically use large bars of 400 ounces. The big ETFs and central banks do not buy gold at local bullion shops - they buy large gold bars by the truckload. This is why the size of different products is an important reason for the price discrepancy. Such large gold bars are beyond the reach of regular people, who prefer kilobars, one ounce bars and coins, or even smaller products. So they have to pay premium for the possibility to get gold products suitable for their shallow pockets.

    Summing up, the bullion shortage and high premiums in the retail market do not prove manipulation in the gold market. They result from the market segmentation and supply disruption together with the explosion in demand for retail gold. But these shortages and high premiums do not have to impact the gold spot price, which is shaped in different segment of the gold market and by different factors. This is why London gold prices could go down during the stock market selloff, as the chart below shows, simultaneously with gold shortages in the retail market.

    Chart 1: Gold prices (London P.M. Fix) from January 2 to June 1, 2020

    To be clear, it doesn't mean that the price of gold will not go up. We actually consider gold's fundamentals to be bullish. But if gold prices appreciate, they will not do it because of the bullion boom in the retail market, which is a small fraction of the whole gold market, but because of stronger fundamentals and better sentiment among bigger players.

    If you enjoyed the above analysis and would you like to know more about the links between the coronavirus crisis and the gold market, we invite you to read the June Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you're not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD

    Sunshine Profits - Effective Investments Through Diligence and Care

  • Gold During Covid-19 Pandemic and Beyond

    June 26, 2020, 5:01 AM

    What a crazy six months! Let's look at the chart below. As you can see, over the first half of the year, gold gained more than 16 percent, rising from $1,515 at the end of December 2019 to $1,762 at the end of June 2020.

    The beginning of the year was, as usual, positive for the gold prices. However, gold did not rally in January as it did in just like in the previous years. Instead, it shot up in February amid mounting worries about the COVID-19 pandemic. After a short correction at the end of the month, probably due to the initial stock market crash, the price of gold jumped to $1,684 at the beginning of March, in the aftermath of the emergency FOMC meeting, when the Fed cut the federal funds rate by 50 basis points.

    Then, when the most acute part of the global stock market happened and investors were selling everything to raise cash, the price of gold plunged below $1,500, bottoming out on March 19. But the rapid spread of the coronavirus, radically accommodative response of the Fed (including slashing interest rates to almost zero) and the implementation of economic lockdowns pushed gold prices to above $1,740 in mid-April (for the first time since late 2012). There was a sideways trend in the gold market with a yellow metal trading between $1,680 and $1,750 until the end of June, when the price of gold jumped above the ceiling.

    How can we judge the gold's performance during the first half of the year and the global epidemic in particular? Well, on the one hand, gold bulls might be a bit disappointed. After all, one could expect that the most impactful pandemic since the Spanish flu of 1918, together with the unprecedented stock market crash, the deepest recession since the Great Depression, and the reintroduction of the ZIRP and quantitative easing would push gold prices much higher. The gain of 16 percent is great, but in the first half of 2016 gold gained even more.

    On the other hand, gold performed much better than many other assets. Although its price declined in March, the drop was relatively mild compared to the stock market crash (see the chart below) or the collapse in oil prices. Gold is actually one of the biggest beneficiary of the coronavirus crisis, confirming its role as a safe-haven asset and portfolio diversifier.

    We have to also remember about three important features of the recent crisis, which limited gains in the gold market. First, there was a fire sale to get cash - and during panic no assets are really safe. In the aftermath of the Lehman Brothers' bankruptcy, the price of gold also declined initially. Moreover, in March 2020, the U.S. dollar appreciated significantly, which put downward pressure on the gold prices, as the chart below shows.

    Second, the coronavirus recession was very deep, but also very short. It means that investors started quickly to expect a bottom and the following rebound, which weakened the safe-haven demand for gold. In other words, the coronavirus crisis was more like a natural disaster rather than financial crisis or recession triggered by fundamental factors (although the global economy slowed down even before the pandemic and the U.S. repo crisis showed that the American financial system is quite fragile).

    Third, the Fed's response was quick and very aggressive, much more radical than in the aftermath of the Great Recession. The U.S. central bank's decisive actions and implementation of many liquidity measures and unconventional monetary policies (as well as Treasury and Congress' actions) managed to quickly restore confidence in the marketplace, spurring the appetite for risky assets rather than safe havens.

    OK. But what's next for the gold market? Well, the key to this question might lie in the chart below. As one can see, there has been a strong negative correlation between the gold prices and real interest rates. In March, the panic was so great that investors were selling even Treasuries, which pushed the bond yields higher, and send the price of the yellow metal down.

    Now, the real interest rates are at very low, negative level, which should support the gold prices. The record low was -0.87 percent, so there is still some potential for going negative, especially given the ultra dovish Fed's monetary policy.

    However, with yields at such low level, there might be limited room for further downward move. So, unless we see a high inflation (or a significant second wave of coronavirus infections, or a softening of the greenback, for example, because of the sovereign debt crisis), we won't expect a significant rally in gold prices (or there might be ups and downs on the way). Actually, if the real interest rates rebound somewhat, the yellow metal may struggle.

    Thank you for reading today's free analysis. If you enjoyed it, and would you like to know more about the links between the economic outlook, the current (past?) crisis and the gold market, we invite you to read the June Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, and we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • Will the Second Wave Trigger Rally in Gold?

    June 19, 2020, 5:47 AM

    The initial health crisis seems to be under control in many countries, including the US. The situation is stabilizing and the governments are easing quarantine restrictions. And, importantly, the number of daily confirmed deaths in the US has peaked in April and has been declining since then, as the chart below shows.

    Chart 1: The number of daily confirmed cases in the United States (as a rolling 7-day average) from December 2019 to June 2020.

    However, this is not the end of the epidemic. Many epidemiologist warn now against the second wave of infections, especially if people stop distancing socially too quickly. For example, Dr. Zhong Nashan, a leading Chinese epidemiologist, has recently said that a lack of immunity among Chinese residents could be a cause for concern in spurring another wave of infections. Are these warnings sensible and what do they imply for the gold market?

    Nobody knows for sure. On one hand, as people put themselves into quarantine long before the governments mandated them to do, they are likely to socially distance even after the Great Unlock. Thus, the second wave may never arrive. Instead, we will have one but prolonged wave with steady influx of new infections.

    On the other hand, for the pandemic to disappear, we need herd immunity, so more than half of the population (at least half, as we could need even 70 percent) would have to be immune either from a prior infection of from a vaccine. And we have bad news here. The vaccine will not arrive in the very near future, while we are still a long way from developing the herd immunity. According to the recent Spanish study, only five per cent of Spain's population has been infected, so far. In the US, even in the hardest-hit communities like the New York state, only 14 percent of residents have been infected at some point by the coronavirus. These results are really frightening, as they show that the disastrous outcomes in Spain or New York are not even close to the worst-case scenario.

    It means that either societies will distance socially until the vaccine arrives, which could be difficult due to the economical and psychological constraints, or the second wave is inevitable.

    History also suggests that the second wave is possible. After all, historians have counted eighteen waves of the bubonic plague of Justinian, although over more than two hundred years, stretching from 541 to 750. More recently, the Spanish flu attacked in three waves (in some areas even in four waves), partially because the authorities eased the restrictions too early. Please remember that the second wave of the 1918 pandemic was much more deadly than the first one.

    And, when it comes to the coronavirus, all countries that seemingly contained the virus - Germany, Japan, Singapore, and South Korea - were hit by the second wave, although a not very large one, as the chart below shows, but these countries were adequately prepared to combat COVID-19 from the very beginning.

    Chart 2: Daily confirmed Covid-19 cases in Germany (purple line), Japan (blue line), Singapore (grey line) and South Korea (red line).

    What would the second wave mean for the gold prices? Well, assuming a similar impact as in the first wave, the price of gold should go up, but not before plunging. Given that the yellow metal appreciated around 8 percent since the stock market crash on February 20, 2020, gold price could ultimately (after a not inevitable from the fundamental point of view, but certainly a possible - decline) reach almost $1,900, assuming another 8-percent upward move.

    However, the second wave does not have to bring similar effects as the first wave. As people have become accustomed to the epidemic, its impact may be weaker. The second wave may be also partially already priced into gold. And just as the simple SIR models of the epidemic turned out to be too gloomy, the second wave may be less deadly than many epidemiologists fear. Such a scenario would be less favorable for gold and we could see some correction then, although the fundamental outlook should remain bullish.

    On the other hand, given the level of complacency in the US stock market and still common hopes for the V-shaped recovery, the second wave of infections might be like a cold bucket of water poured onto heated investors' heads. Such a scenario seems to be more positive for the gold market, although initially the price of gold could drop together with the stock market.

    Which scenario is more probable? I wish I knew! But generally people react the most to new, unknown threats, so they should react less vividly in the future to coronavirus-related risks, especially that the authorities should be better prepared. Remember quantitative easing? The first round was very supportive for the gold prices, while the last one not so much. Similarly, the subsequent rounds of infections could have less and less impact on the financial markets. However, some people are already fed up with the epidemic and hope that life is getting back to normal. The second wave could crash these hopes, especially if it is worse than the first one, as was the case with the Spanish flu.

    Anyway, one thing is certain, life is not likely to be completely "normal" for a significant time, perhaps until a vaccine is widely distributed. And gold prefers such abnormal, exceptional times more than boring business as usual!

    If you enjoyed the above analysis and would you like to know more about the links between the coronavirus crisis and the gold market, we invite you to read the June Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you're not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD

    Sunshine Profits - Effective Investments Through Diligence and Care

  • What Does The Great Disconnect Imply for Gold?

    June 15, 2020, 6:47 AM

    It seems that global stock markets have disconnected from the fundamental reality. They have been rising since the end of March despite the collapsing economies and soaring unemployment. Why? And what does it imply for the gold prices?

    Let's start with the brief review of the economic reality, focusing on China, as the country offers a preview of what is likely to happen in the West a bit later. In April, the industrial production grew 3.9 percent year-over-year, following the 1.1 percent decline in March, as the chart below shows. This is very good news for China's economy. However, it might be too early to trump the full recovery. As a reminder, the industrial production in December 2019, before the outbreak of the pandemic, rose 6.9 percent.

    Chart 1: Industrial production in China from April 2019 to April 2020.

    And the domestic demand remains very weak: the retail sales in China dropped 7.5 percent in April from a year earlier. Moreover, investment fell 10.3 percent in the January-April period on an annual basis, a modest improvement from the 16.1 percent drop posted in the first three months of the year, but still a negative growth below expectations.

    The official unemployment rate reached 6 percent, up from 5.9 percent in March and just shy of February's record of 6.2 percent. Of course, the true unemployment rate is likely twice as much as the official rate does not include people in rural communities and migrant workers. And remember that the global economy is expected to contract 3 percent in 2020, so this decline will negatively hit China, which is the world's factory.

    And there are also significant downside risks on the way to full normalization, with the risk of the second wave of the coronavirus and resulting reemergence of lockdowns being the most important threat for the steady economic recovery. Actually, this is actually materializing right now. According to the Bloomberg News, more than 100 million people in China's northeast region, Jilin province, are once again under lockdown restrictions after new cases of COVID-19 have recently emerged.

    The situation might be even worse, as the Financial Times' China Economic Activity Index in mid-May was still below 80, where 100 is level seen on January 1, 2020. Many of its subindices, such as coal consumption, air pollution, container freight or box office numbers, remain subdued.

    The conclusion is clear: China - and Western countries as well - can forget about the V-shaped recovery, as we have long ago warned. Instead, we could see a U-shaped recovery, which is deeper and more prolonged, or even a L-shaped recovery, which is even slower, although it might be too pessimistic a forecast. Or, there might be actually a mix of V, U, and L: in some industries the recovery will be quicker, while in certain industries - think airlines - it will be slower. Another possibility is that the recovery will look like W, i.e., there will be a rebound in one or two quarters, followed by another dip because of the second wave of epidemic.

    The W-shaped recovery seems to be the most positive scenario for the gold market, as the second wave of injections would imply renewed worries and shaky economy. The slow recovery - U-shaped or L-shaped - will be better for the yellow metal than V-shaped, but they would not have to cause a rally in gold. After all, in the aftermath of the Great Recession, the recovery was very sluggish, but gold entered the bear market in 2011.

    However, the performance of the global equity markets suggests that investors are rather optimistic about the future, at least this is the popular interpretation. Despite rising COVID-19 infections and deaths and the Great Lockdown, despite the collapsing economy and skyrocketing unemployment, the S&P 500 Index has been rising since March 23, as the chart below shows. We know that the stock market is not the real economy and that stock markets are forward-looking and do not want to fight the Fed, but the disconnect is troubling. After all, Mr. Market is not always correct - for example, it overlooked the risk of Covid-19 pandemic.

    Chart 2: S&P 500 Index (green line, left axis) and Dow Jones (red line, right axis) from January 2 to June 2, 2020.

    But the rising S&P 500 Index does not have indicate strong recovery on the horizon. This is because the rebound in the S&P 500 was driven by selected few companies, i.e., Microsoft, Apple, Amazon, Alphabet, and Facebook - the relative winners during the Great Lockdown that forced people to shift into the online world. Moreover, the behavior of cyclical commodities and bond yields suggest rather weak recovery.

    What does it mean? Well, the fundamental outlook does not bode well for equity markets. Given the expected decline in the GDP, the earnings per share for companies listed on the S&P 500 will likely fall by 10-20 percent versus expectations from the beginning of 2020. So, the stock market capitalization from end of May of about 3,000 implies the P/E is higher than before the pandemic! Maybe we should believe more in the collective wisdom of the crowds, but today's equity valuations appear to be at odds with the fundamental reality. The selected few companies will not drive the broad market forever.

    We do not say that the stock market crash is imminent, but rather that at least a correction might happen, which could be positive for the gold prices, although the initial downward move could pull the yellow metal down. In other words, investing in the stock market seems to be risky right now given that the V-shaped recovery is unlikely and given elevated equity valuations, so adding gold, which is good portfolio's diversifier, to the portfolio might be a smart move.

    If you enjoyed the above analysis and would you like to know more about the links between the coronavirus crisis and the gold market, we invite you to read the June Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you're not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD

    Sunshine Profits - Effective Investments Through Diligence and Care

  • Will Great Unlock Push Gold Prices Down?

    June 5, 2020, 7:34 AM

    As Great Lockdown was positive for the gold prices, the Great Unlock will be bad, right? We invite you to read our today's article about the Great Unlock and find out whether it really must be negative for the gold prices.

    It's all government's fault, right? After all, the Great Lockdown was introduced by the federal and state governments introduced, wasn't? Well, not quite.

    Before I will explain why, let me clear one thing up: I'm a liberty lover and I'm skeptical about the government regulations. And the economic shutdown was obviously untenable - the only reason to shut down the economy was to buy some time to prepare the healthcare system for better handling of the epidemic. So, it's good that the Great Lockdown is ending.

    However, the truth is that the economic shutdown was only partially triggered by the government. While in part it was caused by the bottom-up actions of millions of people who were afraid for their health. Indeed, the data shows that many residents essentially began imposing a lockdown on themselves before their government did. For example, the electricity usage indicates that people became homebodies well before they were required to do so. Similarly, the NBER working paper written by Felipe L. Rojas and others writes:

    most of the economic disruption was driven by the health shock itself. Put differently, it appears that the labor market slowdown was due primarily to a nationwide response to evolving epidemiological conditions and that individual state policies and own epidemiologic situations have had a comparatively modest effect.

    Many employers sent their employees home long before any official measures. Many workers reduced their labor supply, while many consumers reduced their shopping activity long before any national or state restrictions. Americans and other nations did not need their governments to tell them to stay home, they all saw what was happening in Italy. People are not stupid, and they are not like sheep who meekly await the orders of their governmental shepherd. So as Jonathan Key noticed in his excellent Quillette story:

    much of the lockdown effect was imposed not by top-down fiat, but through millions of small decisions made every day by civic groups, employers, unions, trade associations, school boards and, most importantly, ordinary people.

    OK, but why are we writing about this? Well, just as many people blame the governments for the economic shutdown, they also hope that the end of the Great Lockdown will quickly revive economic growth. Unfortunately, these hopes are unfounded. The government decrees do not work as a sort of magic wand that first knocked the economy to its knees but now it will bring it to life.

    What does it mean? There will be no V-shaped recovery. Just deal with it. People are afraid - rightly or not - of the new coronavirus. Yes, the mortality rate is not high, but it is several times higher than in case of influenza. And even if it kills only a small percentage of infected people, it can cause serious long-term health complications such as lung scarring, heart damage, lower testosterone level in men, and neurological and mental health effects.

    So, it should not be surprising that customers won't rush to shopping malls, cinemas and restaurants after the Great Unlock. The uncertainty and fear will remain for some time, perhaps even until the arrival of an effective treatment or a vaccine. As a consequence, many shops and restaurants will not reopen after the strict shutdown ends. As a reminder, the restaurant industry itself accounts for about 16 million US jobs.

    And some changes in the labor market will also have permanent effects. As Victoria Gregory and others in another NBER working paper show, the pandemic will "have long-lasting negative effects on unemployment. This is so because the lockdown disproportionately disrupts the employment of workers who need years to find stable jobs." The conclusion is clear: the economy will not quickly return to the pre-pandemic state and trajectory.

    What does it mean for the gold market? The lack of V-shaped recovery is good news for gold. The persistent uncertainty and fear should support the safe-haven demand for gold. The weaker than expected recovery will cause the Fed and Treasury to maintain their dovish monetary and fiscal policies, which should also be positive for the yellow metal. To be clear, we do not claim that gold prices will necessarily rally like crazy. Rather, we argue that the Great Unlock does not have to be very negative for the yellow prices, because it will not be a reverse of the Great Lockdown, and the return to normalcy will be only gradual.

    Chart 1: Gold prices (London P.M. Fix) from January 2 to June 1, 2020

    Indeed, as the chart above shows, the easing of government regulations did not send gold prices down. Actually, gold moved further north in May. And the fundamental outlook for gold - which includes low real interest rates, elevated uncertainty, dovish Fed and mammoth fiscal deficits - should remain positive.

    If you enjoyed the above analysis and would you like to know more about the links between the coronavirus crisis and the gold market, we invite you to read the June Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you're not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD

    Sunshine Profits - Effective Investments Through Diligence and Care

  • Gold Performance During the Great Unlock

    June 5, 2020, 5:38 AM

    Last month, we analyzed the Great Lockdown. As the first wave of infections has been contained, the governments are easing the restrictions. So, in this edition of the Market Overview, we assess the Great Unlock. First of all, we analyze how the gradual reopening of economies will affect the gold prices. We argue that the Great Unlock will not be as great as it sounds, so the price of gold does not have to go down.

    Second, we examine how the second wave of the coronavirus - which is now the biggest threat and in some countries it is already present - could affect gold prices. The issue is not simple, as gold could on one hand gain less than during the first wave as people would be better prepared for the epidemic but on the other hand, it could benefit even more amid extinguished hopes for the quick recovery.

    Third, we study the Great Disconnect between the fundamental reality and the global stock market, drawing implications for the gold market. The S&P 500 Index has been rallying since late March, despite the soaring unemployment rate to levels not seen since the Great Depression. Isn't it strange?

    Last but not least, we analyze the recent shortages of bullion and high premiums in the retail gold market, investigating what happened and what does it mean for the gold market. In particular, we examine whether the divergence between physical and paper gold resulted from the manipulation and whether it signals the bull market.

    We hope that you are healthy and in a good financial position. During the pandemic, the most important job is to survive. But it's not the only task: another is to protect health and capital. We are here to help you in these turbulent times: read our Gold Market Overview and find out what the current crisis implies for the gold market!

  • Will the Fed Trigger Inflation This Time, Boosting Gold?

    May 29, 2020, 6:21 AM

    During Great Recession, many people feared that the Fed's quantitative easing would trigger high inflation, or even hyperinflation. As we know, it didn't happen. Why? Well, the main reason is that the Fed created money - that's true - but in the form of bank reserves. And this is a very specific medium of exchange that does not enter the real economy like cash, but stays within the interbank market. You see, bank reserves are a special kind of money used only between commercial banks and central bank and between commercial banks themselves. So, larger supply of reserves does not therefore automatically translate into higher prices.

    This can happen only if these additional reserves motivate commercial banks to expand their lending. Investors should remember that in the contemporary banking model based on the fractional reserve banking, the bank deposits account for the majority of the money supply. And when the bank deposits are created? They are created whenever banks grant loans.

    As the chart below shows, the growth rate of credit supply was falling during Great Recession, reaching even negative values for some time. Why? For two reasons. First, American households have deleveraged, i.e., they decided to pay back the debts they had, so they were not interested in taking new loans. Second, as the name suggests, the global financial crisis was, well, financial crisis to a large extent. It means that banks were severely hit and they were left with a lot of toxic assets. So, banks themselves were not interested in granting new loans, rather they cleaned their balance sheets. Please also remember that the supervisors tightened the bank capital requirements in the aftermath of the Lehman Brothers' collapse.

    Chart 1: US bank credit (annual % change) from January 2007 to December 2010.

    However, this crisis is different. The Fed and other central banks did not only introduce quantitative easing, but they also implemented other programs which can turn out to be more inflationary. For example, the US central bank will lend, under the Term Asset-Backed Securities Loan Facility, to holders of certain AAA-rated securities backed by newly and recently originated consumer and small business loans. Moreover, the new Main Street Lending Program set by the Fed in April works like this: commercial banks grant loans to small and medium companies employing up to 10,000 workers or with revenues of less than $2.5 billion, and then they retain 5 percent of the loan on their balance sheets but sell the remaining 95 percent of the loans to the Main Street facility created by the Fed.

    All these programs aim to support the flow of credit to employers, consumers, and businesses, encouraging commercial banks to grant new loans to companies that have suffered as a result of the economic lockdown. Moreover, the financial sector has not been hit initially by the coronavirus crisis, while the supervisors eased reserve and capital requirements for banks. The demand for loans from entrepreneurs is also vivid. All this means that the pace of growth of credit and money supply may be higher than during the Great Recession. Indeed, as the chart below shows, they accelerated in March and April.

    Chart 2: The annual % change of the US bank credit (green line) and M2 money supply (red line) from January 2019 to April 2020.

    Summing up, the unconventional monetary policy implemented in the aftermath of the Great Recession did not spur inflation. However, this time may be different. To be clear, we are not saying that we will see hyperinflation in the US. That's still very unlikely. What we mean is that the commercial banks are - so far - significantly more eager to grant new loans. So, the resulting increase in money supply should create higher inflation after some time, if other factors remain unchanged.

    In other words, this crisis is more likely to result in stagflation than the Great Recession, especially as economy faces disruptions in the supply chains. Indeed, please take a look at inflation expectations derived from the 5-year inflation-adjusted Treasuries displayed in the chart below - as you can see, the market does not expect deflation now, as it did in the aftermath of the previous economic crisis.

    Chart 3: US 5-year breakeven inflation rate from January 2007 to April 2020

    Given that gold is considered to be an inflation hedge, the higher odds of inflation are fundamentally positive for the gold prices. It does not mean that disinflation or deflation would be negative for the yellow metal, as it could shine nevertheless during the crisis of any kind, but increased chances for stagflation should be an additional factor that could encourage more investors to buy gold.

    Thank you for reading today's free analysis. If you enjoyed it, and would you like to know more about the links between the coronavirus crisis and the gold market, we invite you to read the May Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, and we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

  • Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis

    May 25, 2020, 7:13 AM

    If you thought that the Great Recession was a disaster, you might want to change your mind soon, as the coronavirus crisis is much broader and deeper. In today's article, we'll compare the Global Financial Crisis from 2007-2008 with the current crisis. Let's find out what it implies for the gold market.

    When the economic crisis hits, the first instinct is to analyze the previous catastrophes to learn what to expect from and how to handle the current calamity. So, not surprisingly, many analysts have already pointed to the 2008 global financial crisis (GFC) as the most relevant example. However, is really the current coronavirus recession similar to the Great Recession? Let's compare these two big crises and draw investment conclusions for the gold market!

    First of all, in terms of scale and pace of the decline, the current crisis is much broader and deeper. It hits practically the whole globe, not only advanced countries, and it affects all offline sectors, not just the financial sector and construction. And in just four weeks, 22 million of Americans made claims for the unemployment benefit. For comparison, during the Great Recession, 37 million unemployment claims were filed. But the Great Recession started in December 2007 and ended in June 2009, so it lasted one year and half. When it comes to output, the cumulative decline in the real GDP amounted to 4 percent during the Great Recession. Meanwhile, just two months of mitigation measures are estimated by some economists to shrink the real US GDP by 10 percent. Even the overly optimistic IMF expects that the US economy will shrink 5.9 percent this year.

    Hence, the severity of the current crisis will be larger than the impact of the Great Recession. After all, it should not be surprising. The current crisis is not a normal economic crisis, but an economic lockdown, during which most people cannot work at full potential. It means that the current crisis is not a mere liquidity crisis, but a profit crisis - entrepreneurs cannot generate revenues, while they still have to bear some costs. Importantly, without profits, companies will lack funds for investments. It all suggests that the effect on the gold prices should be larger, especially since the response of the Fed has also been much more swift and aggressive.

    Of course, there is one caveat, i.e., the duration of the crisis. The Great Recession lasted 18 months. But nobody knows how long the current crisis will take. If it is deep but short, the overall damage may not be as severe compared to the protracted depression. In such a scenario, the positive impact on the gold price might be limited, especially that investors are forward-looking and they can see across the valley. After all, the lockdown will be probably loosened in the coming weeks. However, it remains to be seen whether the crisis will be short. Although some measures may be lifted, we think that some social distancing will stay in place and the economy will not return to full capacity. And the Fed will not normalize its monetary policy in general and its interest rates in particular for a longer period of time, which should support the gold prices.

    The nature of the coronavirus crisis is also different that the nature of the Great Recession. The latter is widely believed to be the financial shock that took a severe toll on the real economy. That's not exactly the truth, as the financial sector got into trouble because of the housing bubble, i.e., the misallocation of resources within the real economy. But we could say that the initial hit was felt by the housing sector, then financial sector, and then the overall real economy because of the credit crunch. In other words, the banks which were engaged in subprime lending were severely hit, so they constrained lending for households and companies.

    In contrast, the coronavirus crisis originated because of the health crisis and the response to it. Radical containment efforts produced a huge shock to the real economy, hurting mainly businesses and their workers. The financial sector has not been hit initially, although it may feel the negative effects in the second-round of effects. Why is this difference important? For two reasons.

    First, it shows that the central banks are helpless against this crisis. Assuming that in 2008 we faced liquidity crises, the Fed could inject liquidity and alleviate the primary source of the problems. But now the Fed addresses only the a secondary financial repercussions, but it cannot deal with the primary shock to the real economy. This is something the gold bulls should rejoice.

    Second, as banks remain relatively unaffected by the initial shock, they are able to expand credit. Hence, the bank credit and broad money supply can grow faster than during the GFC. Actually, as the chart below shows, they do grow faster than during the Great Recession. As one can see, both measures have started to expand above 10 percent year-over-year, much faster than in the aftermath of the financial crisis of 2008.

    Chart 1: The annual % change of the US bank credit (green line) and M2 money supply (red line) from January 2007 to April 2020.

    It means that stagflation is more likely now than during the Great Recession. Please note that we don't claim that it will trigger stagflation for sure - after all, the negative demand shock is severe, while the high corporate debt may limit the demand for credit. However, as the majority of the money supply is created by commercial banks, the fact that this is not primarily a banking crisis, as it was during the Great Recession or during the Great Depression (when banks went under and we had deflation), increases the chances of stagflation (the expected spike in the public debt also increases odds of its monetization and the resulting inflation later in the future).

    Moreover, the current crisis is not only the negative demand shock (as the GFC is believed to be), but also the negative supply shock, which creates some inflationary pressure. No need to say that stagflation seems to be a better scenario for gold prices than the case of low inflation or even deflation (although gold can shine even during such circumstances, as it showed in the aftermath of the Lehman Brothers' collapse).

    To sum up, generals always fight the last war, while the economist and central bankers always fight the last recession. However, the coronavirus crisis is different from the global financial crisis. So, central banks' response may not help much. The former crisis is already worse than the latter. And because it results from negative supply shock as well as negative demand shock, while banks smoothly expand credit (so far), the current crisis could be more inflationary than the Great Recession. This is, of course, good news for gold, which is considered to be an inflation hedge.

    If you enjoyed the above analysis and would you like to know more about the links between the coronavirus crisis and the gold market, we invite you to read the May Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you're not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD

    Sunshine Profits - Effective Investments Through Diligence and Care

  • Will Gold Shine Under the Great Lockdown?

    May 15, 2020, 7:24 AM

    The recession that started in 1929 is called the Great Depression. The global financial crisis that originated in 2007 is named the Great Recession. The current coronavirus crisis can be called the Great Lockdown. As we all already know, the protection measures implemented to contain the coronavirus are severely impacting economic activity. However, the severity of the economic calamity is still uncertain. The initial shock was deep - all economic data, including the jobless claims, retail sales or industrial production - suggests that the downturn will be worse than during the Great Recession.

    Now, we got an "official" confirmation. In its newest World Economic Outlook Report, the IMF projects that the global economy will contract sharply by 3 percent this year, preceded by 2.9 percent growth in 2019. The US economy is expected to plunge 5.9 percent, compared to 2.3 percent growth in 2019. It means that the global and the US economies are likely to experience their worst recessions since the Great Depression, dwarfing the output loss during the global financial crisis from a decade ago.

    OK, we already know that this year will be pretty ugly. But what about the next year - will we see a sharp rebound? Well, in the IMF's baseline scenario, which assumes that the pandemic fades in the second half of 2020 and containment efforts would be gradually unwound, the global economy is projected to grow by 5.8 percent next year, while the US economy is expected to expand by 4.7 percent in 2021. And China's economy is forecasted to rise 1.2 in 2020, accelerating to 9.2 percent in 2021, as the chart below shows.

    Chart 1: Actual and projected real GDP growth for China (blue line), the US (red line) and the global economy (green line) from 2007 to 2021.

    This looks great. But if something seems too good to be true, it probably is. To be sure, there are many reasons for optimism. In some countries, the number of new cases has come down. And the unprecedented pace of work on treatments and vaccines also promises hope. However, the IMF's base scenario assumes basically the V-shaped recovery, which is not likely to happen.

    Surely, the normalization of economic activity will take place from very low levels, but the social distancing will not disappear until the vaccine arrives. We have to remember that when the containment efforts are lifted and people start moving more freely, the virus could again spread rapidly. As long the society does not have herd immunity, the economy will not simply return to normal, pre-pandemic life. And if history of previous deep downturns is any guide, the reduced investment, employment and commercial bankruptcies will leave long-term scars on the economy.

    Moreover, the IMF's baseline scenario assumes no widespread company bankruptcies, extended unemployment or system-wide financial strains. It assumes no sovereign debt crisis, although the Great Lockdown is projected to boost the fiscal deficit among advanced countries from 3 percent in 2019 to 10.7 percent of GDP in 2020, and general government debt from 105.2 in 2019 to 122.4 percent of GDP in 2020. But it remains to be seen, whether the policy actions will prevent all these threats.

    Last but not least, the IMF's projections are always too optimistic - even the Fund itself admits that "even after the severe downgrade to global growth, risks to the outlook are on the downside." Indeed, in the worst case scenario, which assumes a protracted pandemic and longer containment effort in 2020 as well as a recurrence in 2021, the IMF projects that the global economy will not grow 5.8 percent in 2021, but decline 2.2 percent!

    The case of China is illustrative here. The country's GDP shrank 6.8 percent in the first quarter of 2020, the first such decline since at least 1992 when quarterly GDP series started. What is important, is that although economic activity improved in March and April compared to January and February, it remained weak. The unemployment rate remains high, the exports are subdued because of the global recession, while the retail sales data shows that consumption is in slow recovery. All this means that China is far from returning to pre-crisis normal - although the second quarter will be better than the first one, the rebound will be more gradual than previously hoped. All this confirms our thesis that opening America will take more time while the recovery will be weaker than most think.

    What does it all mean for the gold market? Well, the lack of swift rebound means that the recession will be longer, while the recovery slower. That's actually great news for gold, which shines the most during economic crises. The stronger the economic calamity, the higher the chances of second-rounds repercussions for the financial system, and the larger scars on the economy and investors' psyche. In a post-pandemic world, risk aversion could be larger than before the epidemic, which should be positive for safe-haven assets such as gold.

    If you enjoyed the above analysis and would you like to know more about the links between the coronavirus crisis and the gold market, we invite you to read the May Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you're not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD

    Sunshine Profits - Effective Investments Through Diligence and Care

  • Coronapocalypse and Gold - How High Is Too High for the Yellow Metal?

    May 8, 2020, 8:01 AM

    $2,000, $5,000 or even the Jim Rickard's $50,000 as the next target for gold. How realistic are these figures - could we see the yellow metal at $5,000 or even higher amid the coronavirus crisis? We invite you thus to read our today's article and find out how high gold prices can go in this downturn.

    The first quarter of 2020 was clearly positive for the gold market, as the chart below shows. The yellow metal gained 6.2 percent from December 30, 2019 to March 31, 2020, moving from $1,515 to $1,609. In April, the bullion went up even further to $1,693, increasing gains to 11.7 percent in 2020 (as of April 17).

    Chart 1: Gold prices (London PM Fix, in $) in 2020.

    The obvious reason for this bullishmove was the COVID-19 pandemic and the resulting shutdown of the global economy. As a result of the coronavirus shock, most of the major drivers of the gold prices improved. In particular, the real interest rates, as measured by yields on the 10-year inflation-indexed Treasuries, dropped, plunging into negative territory. As one can see in the chart below, gold prices behaved like a mirror image of the real government bond yields.

    Chart 2: Gold prices (yellow line, left axis, London PM Fix, in $) and real interest rates (red line, right axis, in %, yields on 10-year inflation-indexed Treasuries) in 2020.

    Moreover, the risk premium also surged, which supported safe-haven assets such as gold. As the chart below shows, credit spreads greatly widened, while the CBOE Volatility Index skyrocketed.

    Chart 3: CBOE Volatility Index (green line, right axis, index) and ICE BofAML Option-Adjusted Spreads (red line, left axis, %) from January 2 to April 16, 2020

    Some people complain that gold's performance has been rather shy given the depth of the negative economic shock. Well, it's true that gold has not rallied so far, but achieving almost 12-percent gain when almost all assets plunged makes gold one of the best performing asset in 2020, if not the best.

    Gold prices did not soar further because of two factors. First, just as in the immediate aftermath of the Lehman Brothers' collapse, investors started to liquidate gold holdings in order to raise cash. But when the dust settles and the sell-off inevitably ends, the yellow metal will have a cleared path upward.

    Second, the US dollar appreciated amid the coronavirus crisis, as the chart below shows. The greenback is also seen as the safe haven during crashes, so investors switched their funds from all over the world and put them into the US-dollar denominated assets. Given the strong negative correlation between the greenback and gold, the appreciation of the dollar exerted downward pressure on the gold prices. However, gold and greenback can both appreciate during the financial crises, as it was the case in early 2009. Importantly, the surge in the US fiscal deficit and public debt may weaken the dollar in the longer run.

    OK, we know what happened, but what's next for the gold market? Will the price of gold quickly rally to $5,000 or more, as some analysts claim? No. It's true that the Fed's balance sheet is going to balloon, and the money supply will soar, but there is no correlation between the money supply and gold prices. As you can see in the chart below, the broad money supply has been rising since the 1970s (the data series we got unfortunately starts only in the 1980s), when Nixon closed the gold window, but the price of gold has not - instead, the yellow metal experienced bull and bear cycle.

    Chart 4: Gold price (yellow line, left axis, London PM Fix, in $) and the US M2 money stock (red line, right axis, in billions of $) from January 1981 to March 2020

    The ratio between the fiat money supply and gold's supply is no simple formula for gold's fair value. You see, the claims that the soaring money supply could push gold prices to a dozen or even tens of thousands dollars are based on the assumption that the global economy will return to the gold standard (then, the price of gold would have to indeed increase to "replace" the value of all demonetized paper money), which is highly unlikely, no matter whether we sympathize with the idea (we do) or not.

    Let's move now to the aftermath of the Great Recession. The price of gold increased 244 percent, from $775 on September 15, 2008 to $1,895 on September 5, 2011. So, if history replays itself, the price of gold could increase to about $4,140. However, it was not a quick rally, it took three years for gold to reach the peak. And history never repeats itself, but only rhymes: remember that it always easier to rise when you start from lower levels.

    Does it mean that we are bearish on gold? Not at all. Of course, there is a risk for gold outlook that the pandemic will be quickly contained and the economic growth will swiftly rebound. However, we think that the V-shaped recovery is unlikely. Social distancing will not disappear in one day. You see, the pandemic is not confined in time and space like a hurricane or a terrorist attack. The coronavirus will linger through the year (or even longer, according to Michael Osterholm, an infectious-disease epidemiologist at the University of Minnesota). The problem is that people still do not understand that this epidemic is not a matter of just weeks.

    And there are significant downside risks for the economy, which - if they materialize - could push gold prices even further up. In particular, there might be a feedback loop in the financial system that could culminate in a systemic financial crisis. We believe that many analysts underestimate the possibility of further repercussions, hoping for a quick rebound. Remember 2007? Economists believed then that the problems would be limited to the subprime mortgage market and wouldn't affect the whole economy. Yeah, right.

    However, even if the quick recovery happens, the low interest rates, dovish central banks and high debt will stay with us, which would support the gold prices. Thus fundamentally, the coronavirus crisis is very positive for the gold prices, and the outlook for the yellow metal in 2020 has clearly improved compared to a few months ago.

    If you enjoyed the above analysis and would you like to know more about the links between the coronavirus crisis and the gold market, we invite you to read the May Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you're not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD

    Sunshine Profits - Effective Investments Through Diligence and Care

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