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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.

  • Is Gold Really an Inflation Hedge?

    June 11, 2021, 10:48 AM

    Inflation is back, and that’s usually depicted as good for gold. But is the yellow metal still a hedge against inflation, or has something changed?

    Inflation has returned. This is partly understandable. After all, during the Covid recession, consumers and businesses accumulated a lot of cash as their spending was reduced, while revenues were sustained by money transfers from the government. These funds are now entering the economy, which makes demand grow much faster than supply, thus boosting prices. After some time, supply may catch up, curbing inflation. However, there is an important risk that inflation will turn out to be higher and/or more permanent than many analysts believe.

    From the fundamental point of view, gold should benefit from higher inflation. But why? In theory, there are several channels by which inflation supports the yellow metal. First, the inflationary increase in the money supply makes all goods and services more expensive, including gold. Indeed, the scientific paper by Lucey and others finds a reliable long-run relationship between gold and the US money supply.

    Second, gold is a real, tangible and rare good with limited supply that cannot be increased quickly or at will. These features make gold a key element during the so-called flight into real values or into hard assets, which happens when inflation gets out of control. In other words, gold is the ultimate store of value which proved to hold its worth over time, unlike paper currencies that are subject to inflation and lose their value systematically.

    Third, inflation means the loss of purchasing power of the currency, so when the greenback depreciates quicker than its major peers, the dollar-denominated price of gold increases. Fourth, when inflation is unexpected or when the Fed remains behind the curve and doesn’t hike nominal interest rates, real interest rates decline, supporting gold prices.

    Fifth, high inflation increases economic uncertainty, which increases safe-haven demand for gold. In other words, an outbreak of inflation introduces some turbulences and leads to portfolio rebalancing, thus increasing gold’s appeal as a portfolio diversifier. During inflation, bonds underperform, so gold’s attractiveness increases.

    And last but definitely not least, gold is perceived as an inflation hedge. But is it really a good hedge against inflation? I analyzed this issue a few years ago – it would be nice to provide an update in light of more recent developments. So, let’s take a look at the chart below, which shows gold prices and CPI annual inflation rates.

    As one can see, the relationship between these two series is far from being perfect. Actually, the correlation coefficient is significantly below zero (-0.41), which means that the correlation is negative! It means that although there are certain long-term trends – for example, gold rallied during stagflation in the 1970s and entered a bear market during the disinflation period in the 1980s and 1990s – there is no positive relationship between the CPI annual percentage change and the price of gold on a monthly basis.

    In other words, the data shows that gold may serve as an inflation hedge only in the long run, as gold indeed preserves its value over a long time (for example, in the period from 1895 to 1999, the real price of gold increased on average by 0.3% per year). It is a good choice for investors also when there is relatively high and accelerating inflation, usually accompanied by fears about the current state of the U.S. dollar and a lack of confidence in the Fed and the global monetary system based on fiat monies.

    However, let’s not draw conclusions too hastily. The chart below also presents the CPI and gold – but this time both series are year-on-year percentage changes (previously we had gold prices, now we have annual percentage changes in these prices).

    Have you noticed something? Yup, this time both series behave much more similarly. Indeed, the correlation coefficient is now positive (0.44). Hence, there is a positive relationship between gold and inflation although not always seen in absolute prices (but in changes in these prices), and not always seen in the CPI (as inflation has broader effects not limited only to consumer prices).

    Summing up the above analysis, it seems justified to claim that gold could benefit from the current elevated levels of inflation, especially if it turns out to be more lasting than commonly believed. It will also be good for gold if the Fed remains dovish and tolerant of inflation surpassing its target significantly.

    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: Effective Investment through Diligence & Care.

    -----

    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.

  • The Return of Inflation. Can Gold Withstand the Dark Side?

    June 4, 2021, 6:17 AM

    Inflation broke into the economy violently. It’s a destructive, dark force. But gold can resist it, being after all a much stronger asset than Anakin Skywalker.

    Last month, I wrote that “inflation is knock, knock, knockin’ on golden door”. I was wrong. Inflation didn’t knock, it broke down the door! Indeed, as the chart below shows, the core CPI surged 3%, while the overall CPI annual rate soared 4.2% in April – this is twice the Fed’s target!

    Now, the question is whether this elevated inflation will turn out to be just “transitory”, as the Fed and the pundits claim, or become more permanent. On the one hand, given that April-May 2020 was the worst phase of the pandemic with the deepest price declines, the current high inflation readings are perfectly understandable, and we could see lower numbers later this year.

    On the other hand, inflation may be higher and/or more persistent than many analysts believe. After all, the April reading came as a shock for them and even for the top US central bankers. For example, Richard Clarida, the Fed Vice-Chair, said: “I was surprised”. It shows that there is more in high inflation than just the base effect. Indeed, the CPI index with February 2020, i.e., the last pre-pandemic month as a base, has jumped 3.1% so far – lower but still significantly above the Fed’s target.

    It shouldn’t be surprising given the surge in the broad money supply and increase in fiscal transfers to citizens. Incomes are higher and people are ready to spend their money. Stronger demand met with supply shortages, so the prices rose. And what is important, the increases are widespread: from commodities to used cars and houses.

    However, there are a few important upside risks to inflation. First, a rise in wages. Although employment is far from the pre-epidemic level, entrepreneurs struggle to find workers. Therefore, they could be forced to increase wages to pull employees away from generous government benefits. If passed on, higher input costs would translate into higher consumer prices.

    Second, a housing boom. Rising housing prices show that inflationary pressure is something more than just CPI inflation, and all this could drive shelter inflation higher. More importantly, though, as shelter dominates in the CPI basket, the official inflation would rise as a result.

    Third, an increase in inflationary expectations. In May, the University of Michigan index that gauges near-term inflation expectations surged to 4.6%from 3.4%in April. What’s important, the index that measures inflation expectations for the next five years also rose – from 2.7% in April to 3.1% in May, which is the highest level in a decade. As the chart below shows, the market-based inflation expectations have also been surging recently.

    This is a very important development, potentially even a game-changer. You see, inflation remained low for years partially because Americans didn’t expect high inflation. They used to see persistent inflation as a thing of the past. They had strong confidence in the Fed, believing that the US central bank would quickly intervene to prevent inflation.

    However, that belief could go away now. The Fed’s new monetary framework and officials’ speeches clearly indicate that the US central bank has become more tolerant of higher inflation. The Fed has returned – just like in the 1970s – to focus on full employment and its “shortfalls” instead of deviations, forgetting that economies can become too hot as well as too cold. Given the dominance of doves in the Fed – but also in the Treasury with Yellen as a Secretary – one can reasonably doubt whether or not the US central bank is ready to hike the federal funds rate in response to higher inflation. Just like in the years before the Great Stagflation, the Fed could decide that it’s better to live with inflation than bear the pain of combating it.

    More importantly, such a fight would be challenging now, as the public debt is a few times higher.

    As the chart below shows, the federal debt held by the public is now 100% of the GDP, four times larger than throughout the 1970s. Hence, the increase in interest rates would amplify fiscal deficits even more. To paint the perspective, April’s core CPI was the highest since 1982, when the Fed was trying to control inflation, and interest rates were double-digit. So, the government would be obliged to cut its expenditures, while the climate is rather to spend as much money as possible. Therefore, the Fed is under strong pressure not to tighten its monetary policy.

    What does all this mean for the gold market? Well, when people question the willingness or ability of the government and central bank to tame inflation, they expect it to go higher, which increases the actual inflation and make it more persistent. Such a negative surprise, with inflation expectations unanchored, would make prices rise abruptly – but also the demand for gold as an inflation hedge would increase. Given the widespread economic repercussions and elevated uncertainty triggered by higher inflation – which is one of the biggest threats to this economic cycle – gold could gain as a safe-haven asset.

    Of course, gold is not a perfect inflation hedge in the short term. If interest rates increase or the Fed tightens monetary conditions in response to inflation, gold may struggle. Actually, a start of normalization of the monetary policy could push gold downward, just as it happened in 2011.

    However, given the current pretending that “there is no inflation” by the Fed, it’s likely that the US central bank won’t react promptly, remaining behind the curve. The delay in tightening could de-anchor inflationary expectations and trigger an inflationary spiral, pushing real interest rates down but also gold prices up.

    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: Effective Investment through Diligence & Care.

    -----

    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 Gold Shine Under Bidenomics?

    May 28, 2021, 11:21 AM

    Bidenomics is a big departure from sound economics. But when reason sleeps, gold fortunes are born.

    Biden’s triumph in the presidential election does not just mean that a new man lives in the White House. It actually implies a fundamental shift in economic policy. Some analysts even see Biden’s agenda as a decisive break with neoliberalism or “Washington consensus”.

    You see, in the old orthodoxy, most economists trusted in markets, argued for privatization, deregulation, and liberalization. Taxes and social benefits should be low and don’t discourage work and investments. The governments should run balanced budgets, avoiding large and permanent fiscal deficits, while central banks should hike interest rates to prevent inflation from running out of control.

    The focus was on scarcity and limited supply. The economy was believed to operate generally at potential, so the key factors to fast economic growth were structural reforms and adequate supply-side policy to strengthen incentives to work and invest. Governments shouldn’t run fiscal deficits as they could crowd out private investments, and they shouldn’t stimulate the demand as it would misallocate resources and could overheat the economy, leading to inflation. The monetary policy was better suited to occasionally fight economic crises.

    How much has changed! Now, the focus is on slack and the demand side of the economy. The growth is held by chronic lack of demand – this is the key tenet of Keynesian economics, the hypothesis of secular stagnation, and the Modern Monetary Theory – so, governments and central banks should continuously stimulate the economy through easy monetary and fiscal policies. As real interest rates are low and demand is weak, rising public debt is not a problem. Inflation is not a problem either; after all, if there is always slack in the economy which operates below its full potential, there is practically no risk of inflation.

    Indeed, Biden has pushed the American Rescue Plan Act of $1.9 trillion (or about 9%of the GDP) without presenting any plan of longer-term deficit reduction. And additional huge government expenditures are coming with Biden’s infrastructure plan. It seems that no one is interested any longer in how the government is going to pay for its spending and obligations, or in long-term consequences of practically unprecedentedly large fiscal deficits (see the chart below). Interest rates are low, so let’s live like there’s no tomorrow!

    Another notable example is, of course, the Fed’s new monetary framework. The US central bank has ultimately disregarded the idea of the Philips curve and the natural rate of unemployment. There is no level of employment that could boost the inflation rate, so there is no need for any preventive actions. What really counts is the actual inflation rate, not the expected one. The central bank shouldn’t fight with symmetrical deviations from the economy’s long-term path determined by technological progress and other supply-side factors any longer, but only with shortfalls from the full employment.

    So, what does Bidenomics (and Powellomics) imply for the gold market? Well, Biden is not the first politician who thinks that there are no economic limits to his ideas. But the pandemic and the economic crisis, the environment of ultra-low interest rates, and the fact that the Democratic base has shifted further to the left implies that Bidenomics may become a radical departure from sound economics. However, a crazy idea that “borrow & spend without a limit” is the key to prosperity is positive for the gold market, as the yellow metal is a safe-haven asset and a hedge against insane economic policies.

    What is important here is the fact that we have actually tested this approach. In 1960, just like today, the Keynesian economists who dominated in the mainstream (and politicians who trusted them) thought that the main task of economic policy is to actively and permanently stimulate aggregate demand. The result was stagflation in the 1970s, as it turned out that economies may overheat as well. Gold shined then, so it should also benefit today from similarly unsound economic ideas and policies.

    So far, the pace of economic recovery has been fast, while the inflation rate has remained limited. But this may change quickly when people stop trusting that the Fed and the government will swiftly take action to contain inflation if it breaks out. However, given the current mindset and macroeconomic ideas, how probable is it that the policymakers will accept substantial interest rate hikes, cuts in spending, and probably also a recession when faced with 1970s-style inflation? Not very likely, indeed. Hence, if inflation continues to rise, while the Fed remains ultra-dovish, inflationary expectations may become unanchored, and inflation may get out of control taking gold with it on a wild journey north.

    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 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: Effective Investment through Diligence & Care.

    -----

    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 Bitcoin Replace Gold?

    May 21, 2021, 7:21 AM

    Note: This article was written just before this week’s most recent plunge in cryptocurrencies, however, the general principle still applies. Cryptos can still play a parallel role to precious metals, but are not necessarily their substitute. Furthermore, the most recent exodus in cryptos and subsequent price drop is most likely just a temporary dip. The general trend still points to the upside. 




    Bitcoin’s popularity and price are rising. However, cryptocurrencies could be seen as complementary, not substitutive to gold.

    What a rally! Unfortunately, I’m not referring to gold, but to Bitcoin. As the chart below shows, the price of the first and the biggest of cryptocurrencies rose to above $60,000 in April 2021 from scratch (or $124) in October 2013 when the chart starts. I wish I had bought more coins in these early years of cryptocurrencies and held them for longer! More recently, Bitcoin has skyrocketed almost 1200% from its bottom of $4,945 during the asset sell-off in March 2020.

    OK, but why am I writing about Bitcoin in the Gold Market Overview? The reason is the narrative that the cryptocurrency has already become or will become soon the substitute for gold. Some people even call Bitcoin “new gold” or “millennial gold”. And this is what Jerome Powell has recently said about cryptocurrencies:

    Crypto assets are highly volatile and therefore not useful as a store of value. They are not backed by anything. It is a speculative asset that is essentially a substitute for gold rather than for the dollar.

    Others echo Powell’s remarks, claiming that Bitcoin is displacing gold as an inflation hedge, or that it could supplant gold as a safe-haven asset. Are they right?

    Well, there are, of course, some similarities between Bitcoin and gold which make these two assets substitutes to some extent. It would be surprising if that wasn’t the case, given the fact that Bitcoin’s system was designed to mimic the gold standard. In particular, there is a cap on the number of bitcoins to make this cryptocurrency rare just like the yellow metal. In other words, the idea is to make its supply inflexible, just as – or even more – in the gold standard. So, both Bitcoin and gold are anti-inflationary currencies whose supply cannot be arbitrarily changed like in the case of national fiat currencies. And both these assets have a libertarian, anti-government flavor – in the sense that demand for them stems from the lack of confidence in the government monies.

    However, there are also important differences between Bitcoin and gold. First of all, although Bitcoin is believed to be an alternative anti-fiat asset, it’s actually also fiat money. It’s a private, decentralized, non-governmental currency, but it doesn’t change the fact that Bitcoin is not backed by anything, and it has no intrinsic value. Of course, value is subjective, but gold has some non-monetary use (in jewelry or technology), which implies that its price is not likely to drop to zero in a worst-case scenario in which people cease to see gold as a monetary asset. Unlike the shiny metal, Bitcoin has only monetary value – i.e., you cannot use it either as a consumer good or as an input in a production process – so there is no floor below its price (if the officials try to ban Bitcoin, its price could plunge really deeply).

    Second, Bitcoin is much more volatile than gold. Sure, it might be just a problem of Bitcoin’s young age. But it doesn’t change the fact that price declines in the cryptocurrency are a few times bigger than in the gold market. Hence, although – thanks to the network effects and speculative appeal – Bitcoin offers potential for quicker and larger gains, it’s also associated with higher downward risks. It makes the cryptocurrency an inferior store of value and a safe haven. So, Bitcoin could be seen rather as a risky asset, not necessarily a safe haven that goes up together with risk appetite. This may explain the recent divergence in cryptocurrencies and gold.

    What does it all mean for the gold market? Well, it’s true that some money has flowed from gold into Bitcoin and that some investors may prefer now to treat Bitcoin as a major alternative asset in their investment portfolios. However, such flows and rebalancing of portfolios as we’ve seen recently are perfectly normal, especially given that Bitcoin is still benefiting from the network effects, i.e., the accelerating institutional interest and mainstream acceptance.

    More importantly, there are important differences between gold and Bitcoin, which imply that the latter won’t replace the yellow metal. The correlation coefficient between the weekly prices of these two assets is only 0.38 percent, so they are really far away from being perfect substitutes. Also, please take a look at the chart below which shows their prices in 2019-2021.

    As you can see, gold reached its peak in early August, while the rally in the cryptocurrency started in October, two months later. Hence, it should be clear that Bitcoin didn’t cause the plunge in gold prices. We could even hypothesize that gold has undergone (or is undergoing) a healthy correction, which is still ahead of Bitcoin. After all, its price chart looks parabolic, which brings to mind the possibility of a bubble (although network effects can be partially responsible for this shape).

    Anyway, for us, these two assets are rather distinct despite all the similarities. And they both can coexist together as hedges against national fiat currencies, as they complement each other. Bitcoin can be used in instant payments, cross-border payments and as a highly risky speculative asset, while gold has non-monetary value and provides long-term stability. But Bitcoin’s rise in popularity doesn’t pose an existential threat to gold. After all, the yellow metal has an exceptional track record of being the ultimate money, proving its value over millennia.

    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 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: Effective Investment through Diligence & Care.

    -----

    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.

  • When Euphoria Ends, Gold Bulls Enter the Scene

    May 14, 2021, 9:34 AM

    Market participants are very optimistic about an economic recovery, but these positive expectations may be exaggerated. The end of this euphoria should be good for gold.

    The optimism about the pace of economic recovery from the 2020 recession is growing. The analysts race in upward revisions of GDP growth in the coming quarters. For example, the IMF – in the April 2021 edition of the World Economic Outlook – expects at the moment that the US economic output will increase by 6.4% this year, compared to the 5.1% growth forecasted in January.

    The euphoric mood has some justification, of course. The vaccination is progressing, entrepreneurs are used to operating under sanitary restrictions, economies are reopening and governments are spending like crazy. At the same time, central banks are maintaining ultra-easy monetary policy, keeping financial conditions loose.

    Furthermore, some economic data is consistent with strong rebounding, especially in manufacturing. For instance, the IHS Markit U.S. Manufacturing PMI Index posted 59.1 in March, up from 58.6 in February – being the second-highest value on record since May 2007 when data collection began. Services are also recovering vigorously, as the IHS Markit US Services PMI Index registered 60.4 in March, up from 59.8 in February. It’s the fastest rate of growth since July 2014.

    Now, the question is how strong the current boom is and how long it is going to last. Well, there is no need to argue that we will see a few strong quarters of GDP growth in the US and other countries. But for me, the euphoria is exaggerated. You see, the current recovery is not surprising at all. As the Great Lockdown plunged the world into a deep economic crisis, the Great Unlocking is boosting the global economy.

    And there is the base effect. There was a low base in 2020, so the seemingly impressive recovery in 2020 is partially merely a statistical phenomenon. Let’s illustrate this effect. In Q2 2020, the real GDP plunged from $19,020 to $17,302 trillion or 9.03%year-over-year, as the chart below shows.

    However, the rebound to the pre-recession level would imply the jump of 9.93%, almost one percentage higher! This is how the math works: when you divide a numerator by a smaller denominator, you get a greater percentage. So, it would be alarming if the recovery were not strong after one of the deepest crises in history.

    Another issue that makes me more skeptical than most pundits is the fact that the main reason behind economic growth upgrades is massive fiscal stimulus. Uncle Sam injected more than 13 percent of the GDP in government spending (only in 2020) that ballooned the fiscal deficits. Meanwhile, the Fed widened its balance sheet by almost $4 trillion. So, it would be quite strange if we didn’t see impressive numbers in light of such unprecedented inflows of monetary and fiscal liquidity. But it means that the impressive recovery in statistics is driven, at least partially, by soaring money supply and public debt (see the chart below).

    And my three last concerns. First, the job recovery is more sluggish than the GDP recovery. The unemployment rate is still above the pre-pandemic level, while the labor force participation stands significantly below the level seen in February 2020. Second, a full return to normal life will occur if vaccines remain effective. But there is a tail risk of new variants of the virus, which could even be vaccine-resistant. Third, history teaches us that when the pandemic ends, social unrest may reemerge. After all, the epidemic left us with deepening inequalities and rising living costs.

    What does it all mean for the gold market? Well, the market euphoria about the economic rebound is negative for gold. We have already seen how these optimistic expectations freed the risk appetite and boosted economic confidence, sending bond yields higher, but gold prices lower.

    However, just as the doomsday scenarios created in the midst of the epidemic were excessively negative, the current ones seem to be too optimistic. I expect that with the year progressing, these expectations will soften or shift to the medium-term, which could be more challenging. After all, the low base effect will disappear, and both the monetary and fiscal policies will have declining marginal utility. At the same time, there will be an increased risk of high inflation, debt crisis, stock market correction or even financial crisis. After all, the current levels of stock indices are partially caused not by fundamentals, but by the elevating risk tolerance thanks to the central banks standing behind most asset classes ready to intervene in case of problems.

    It seems that this process has already begun and the reopening trade is waning. Economic confidence is very high, so the room for further increases is limited. The low-hanging fruits have been collected, and when economies reopen fully, the structural problems will become more important than the cyclical ones. Investors have started to worry about higher inflation, especially because the Fed remains unmoved by rising prices. A jobless recovery would prolong the Fed’s very dovish stance, as the US central bank focuses now on full employment rather than on stable prices. All these factors explain why the price of gold has been rebounding recently, and why it can rise even further later this year, although the fact that the US enjoys a stronger recovery than the EU or Japan could support the interest rates and the greenback, creating some downward pressure on the yellow metal.

    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 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: Effective Investment through Diligence & Care.

    -----

    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.

  • Inflation Knock-knock-knockin’ On Golden Door

    May 7, 2021, 10:06 AM

    Inflation is not coming. It is already here! Gold should benefit, given that it could be higher and more lasting than the pundits believe.

    “Knock, knock, knockin’ on heaven’s door”, so sing Bob Dylan and Guns N’ Roses. Now, inflation is knocking on the golden door. According to the BLS, the U.S. CPI inflation rate recorded a monthly jump of 0.6% in March, while soaring 2.6% on an annual basis. And the core inflation has also accelerated. So, inflation has significantly surpassed the Fed’s target of 2%, as one can see in the chart below.

    And remember that this is what the official data shows, which rather underestimates the true inflation. This is because of several issues, including hedonic quality adjustments, shifts in the composition of the consumer baskets and methodological changes. It is enough to say that the rate of inflation calculated by the John Williams’ Shadow Government Statistics that uses methodology from the 1980s is over 10% right now.

    There are some controversies about this alternate data, but I would like to focus on something else. The CPI doesn’t include houses (or other assets) into the consumer baskets, as they are treated as investments. The index only takes rents into account. But homeowners don’t pay rents, so for them, the cost of shelter, which accounts for about one-fourth of the overall CPI, is the implicit rent that owner-occupants would have to pay if they were renting their homes. And this component rose just 2 percent in March, while the Case-Shiller Home Price Index, which measures the actual house prices, soared more than 11% in January (the latest available data). According to Wolf Street, if we had replaced the owners’ equivalent rent of primary residence with the Case-Shiller Index, the CPI would have jumped 5.1 instead of 2.6%. The chart below shows the difference between these two measures.

    Hence, inflation has come, and even the official data – which can underestimate the level of inflation that ordinary people deal with in their daily lives – confirms this. If you’ve been buying food lately, you know what I mean. Now, the question is whether this inflation will be temporary or more lasting.

    Powell, his colleagues and the pundits claim that higher inflation will only be a temporary phenomenon caused by the base effect. The story goes like this: the CPI plunged in March 2020, which created a lower base for today’s annual inflation rate. There is, of course, a grain of truth here. But let’s take a look at the chart below. It shows the CPI, with both March 2020 (red line) and February 2020 (green line) as a base. As you can see, in the latter case the index jumped 2.3%. Yes, lower, but not significantly lower than 2.6% when compared to March 2020. So, the Fed shouldn’t blame the base effects for accelerating inflation (and funny thing: have you heard the pundits talking about the base effect when they were talking about vigorous GDP recovery?).

    Instead, central bankers should blame themselves and their insane monetary policy. After all, as the chart below shows, the Fed’s balance sheet has soared $3.4 trillion (or 81%), while the broad money supply (measured by M2) has increased more than $4 trillion (or 26%) from February to date.

    They could also blame reckless fiscal policy. Growing government spending, enabled by a rising pile of debts monetized indirectly by the Fed, has headed for Main Street. This, combined with a jump in the broad money supply, is the key change compared to the Great Recession when almost all stimuli flowed into Wall Street and big corporations. Sure, some people use the received money to increase savings and repay debts. But with the reopening economy, some of the pent-up demand will be realized. Actually, many Americans have already started spending free time traveling like crazy after being locked in homes for so long.

    And this is very important: consumers are therefore more eager to accept higher prices. It shouldn’t be surprising given all the checks they got and how hungry for normal life they are. As I reported last month, companies are reporting rising prices of commodities and inputs (partially because of the supply disruptions too), but so far their power to pass the producer price inflation to consumers has been limited. However, this is changing. The April report IHS Markit U.S. Services PMI observes that

    Rates of input cost and output charge inflation reached fresh record peaks, as firms sought to pass on steep rises in input prices to clients (…) A number of companies also stated that stronger client demand allowed a greater proportion of the hike in costs to be passed through. The resulting rate of charge inflation was the quickest on record.

    All these reasons suggest that higher inflation could be more lasting than most of the so-called experts believe (although the officially reported inflation doesn’t have to show it). This is good news for the yellow metal. Higher inflation implies lower real interest rates and stronger demand for gold as an inflation hedge. What is important here is that we have more inflationary pressure in the pipeline exactly at the time when the Fed has become more tolerant of inflation. So, the combination of higher inflation with a passive central bank position sounds bullish for gold. The key issue here is whether the markets believe that the Fed will allow for higher inflation. So far, they have been skeptical, so the expectations of interest rates hikes accumulated and the bond yields rallied. But it seems that the Fed has managed to convince the markets that it’s even more incompetent than it is widely believed. If the distrust in the Fed strengthens, gold should return to its upward trajectory from the last year.

    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 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: Effective Investment through Diligence & Care.

    -----

    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 Sings a “Hot N Cold” Song

    April 30, 2021, 11:15 AM

    Although spring has begun, we can still find ourselves in winter, or even summer. Gold may benefit from such a seasonal aberration.

    Oh, how wonderful, spring has finally started, hasn’t it? We have April, after all. Well, in calendar terms, it’s indeed spring, but economically it can be summer already or still the beginning of winter. How so? I refer here to Kondratiev cycles (also known as Kondratieff cycles or Kondratyev cycles).

    As a reminder, Nikolai Kondratiev was a Russian economist who noted in the 1920s that capitalist economies experience long super-cycles, lasting 40-60 years (yup, it’s not a very precise concept). His idea was that capitalism was not on an inevitable path to destruction, but that it was rather sustainable and cyclical in nature. Stalin didn’t like this conclusion and ordered a prison sentence and, later, an execution for Kondratiev. And you thought that being an economist is a boring and safe profession!

    The Kondratiev cycles, also called waves, are composed of a few phases, similar to the seasons of the year. In 2018, I defined them as follows:

    • Spring: economic upswing, technological innovation which drives productivity, low inflation, bull market in stocks, low level of confidence (winter’s legacy).
    • Summer: economic slowdowns combined with high inflation and bear market in stocks, this phase often ends in conflicts.
    • Autumn: the plateau phase characterized by speculative fever, economic growth fueled by debt, disinflation and high level of confidence.
    • Winter: a phase when the excess capacity is reduced by deflation and economic depression, debt is repaid or repudiated. There is a stock market crash and high unemployment rate, social conflicts arise.

    However, other economists define these phases in a slightly different manner. For them, spring is an inflationary growth phase, summer is a period of stagflation (inflationary recession), autumn a deflationary growth period, while winter is a time of deflationary depression.

    So, which phase are we in? That’s a very good question. After all, the whole concept of Kondratiev cycles is somewhat vague, so it’s not easy to be precise. But some experts believe that we are likely in the very early part of the winter after a very long autumn. Indeed, there are some important arguments supporting such a view.

    First, we have been experiencing a long period of disinflation (and later just low inflation), a decline in the bond yields, and economic growth fueled by debt. I refer here to the time from the end of the Great Recession until the Covid-19 pandemic, but one can argue that autumn lasted since the early 1980s, when both interest rates and inflation peaked, as the chart below shows.

    Second, winter is believed to be a depression phase with stock and debt markets collapsing, but with commodity prices increasing. And this is exactly what we are observing right now. I refer here to the rally in several commodity prices. This is at least partially caused by the disruption in the supply chains amid the epidemic in the U.S. and worldwide pandemic, but if the bull market in commodities sets in for good, this could be a negative harbinger for the stock market. After all, more expensive raw materials eat into corporate profits.

    Third, winter is thought of as a period that tears the social fabric of society and deepens the inequalities. The data is limited, but the coronavirus crisis has been one of the most unequal in modern U.S. history, as its costs have been borne disproportionately by the poorer parts of society that have been unable to work online.

    So, “winter is coming” may be a belated warning, as winter could have already begun. Later during this period, we could see bankruptcies of firms and financial institutions, and even some governments, as a delayed consequences of the coronavirus crisis. This is bad news for the whole of Westeros and its economy, but good for gold. Investors who don’t like the cold should grab a golden blanket to hedge them from the winter.

    However, in 2018, I expressed the opinion that summer may come in the 2020s, as the debts are rising and the inflationary pressure is growing:

    As the global economy recovered and now expands, inflation is low, while stocks still rally, we enjoy spring. This is why gold has remained in a broad sideways trend in the last few years. However, as we are on the edge of the next technological revolution, confidence is finally rising and there are worries about higher prices, and we could enter the summer phase in the not-so-distant future.

    And I still believe that my opinion makes sense. Indeed, after the global financial crisis of 2007-9, we have seen several spring features: low inflation, a bull market in stocks, and a low level of confidence (after all, there was “the most hated rally in the stock market”), which was a legacy of winter, i.e., the collapse of Lehman Brothers and the following economic crisis.

    And summer is generally a period of stagflation, which is exactly what I’m expecting. You see, after a strong economic recovery in the nearest quarters, the U.S. economy is likely to return to a mediocre pace of economic growth, but with much higher inflation. After all, there is strong monetary and fiscal stimulation ongoing right now, another feature of summer. Meanwhile, winter is generally a deflationary period, so the specter of inflation rather suggests that summer may be coming and investors should hedge themselves against waves of gold.

    Luckily, gold offers its protection not only against winters, but also against summers. Indeed, gold performs the worst during autumns, when there is disinflation, like in the 1980s and the 1990s, and the best during winters (due to the economic crisis – remember the 2000s?) and the summers (due to high inflation – remember the 1970s?).

    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 April 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 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: Effective Investment through Diligence & Care.

    -----

    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 a Fiscal Revolution Raise Gold to the Throne?

    April 23, 2021, 10:00 AM

    Revolution, baby! There is growing acceptance for an aggressive fiscal policy, which could be supportive for gold prices from the fundamental, long-term point of view.

    We live in turbulent times. The pandemic is still raging and will most likely have lost lasting effects on our society. But a revolution is also happening right before our eyes. And I don’t mean another storming of the U.S. Capitol or the clash of individual investors with big fish on Wall Street. I have in mind something less spectacular but potentially more influential: a macroeconomic revolution.

    I refer here to the growing acceptance of easy fiscal policy. In the aftermath of the Great Recession, the central banks adopted an aggressive monetary policy, slashing interest rates to almost zero and introducing quantitative easing. It has become a new norm since then.

    But fiscal policy was another kettle of fish. Although almost nobody cared about balanced government budgets, people at least pretended to worry about overly large fiscal deficits and an overly quick accumulation of public debt. For example, while Obama wanted $1.8 trillion in fiscal stimulus in a response to the global financial crisis of 2007-09, Congress passed a package of about $800 billion, as Republicans opposed larger spending. But in March 2020, Congress passed the CARES act worth about $2 trillion (and additional significant stimulus in December 2020), with the full support of Republicans.

    Even Germany – the country famous for its fiscal conservatism – ran a fiscal deficit in 2020 and – what’s more – agreed to issue bonds jointly with other EU countries, although it was previously a taboo. The International Monetary Fund (IMF), another bastion of economic orthodoxy, which advocated for austerity and balanced budgets for years, gave up during the epidemic and started to call for more fiscal stimulus to fight the economic crisis.

    And this fiscal revolution is already seen in data. As the chart below shows, the U.S. fiscal deficit has increased from 4.6 percent of GDP in 2019 (which was already at an elevated level) to 15 percent of GDP in 2020, the highest level in the post-war era.

    According to the IMF’s Fiscal Monitor Update from January 2021, fiscal deficits amounted to 13.3 percent of GDP, on average, in advanced economies, in 2021, a spike from 3.3 percent seen in 2019. As a consequence, the gross global debt approached 98 percent in 2020 and it’s projected to reach 99.5 percent of the world’s GDP by the end of this year.

    What is important to note here is that government support wasn’t limited mainly to the financial institutions and big companies (such as automakers), as was the case in 2009, but it was distributed more widely. There was a huge direct money transfer to Main Street, including checks for practically all citizens. This is important for two reasons.

    First, money flowing into the economy through nonfinancial institutions and people’s accounts may be more inflationary. This is because money doesn’t stay in the financial market where it mainly raises asset prices, but it’s more likely to be spent on consumer goods, boosting the CPI inflation rate. Higher officially reported inflation (and relatively lower asset prices) should support gold, which is seen by investors as an inflation hedge.

    Second, the direct cash transfer to the people creates a dangerous precedent. From now, each time the economy falls into crisis, people will demand checks. It means that fiscal responses would have to be increasingly larger to meet the inflated expectations of the public. It also implies that we are approaching a universal basic income, with its mammoth fiscal costs and all related negative economic and social consequences.

    Summing up, we live in revolutionary times. The old paradigm that “central banks are the only game in town” has been replaced by the idea that fiscal policy should be more aggressively used. Maintaining balanced budgets is also a dead concept – who would care about deficits when interest rates are so low?

    However, assigning a greater role to fiscal policy in achieving macroeconomic goals increases the risk of higher inflation and macroeconomic instability, as politicians tend to be pro-cyclical and reckless. After all, the economic orthodoxy that monetary policy is better suited to achieve macroeconomic stability didn’t come out from nowhere, but from awful experiences of the fiscal follies of the past. I’m not a fan of central bankers, but they are at least less short-sighted than politicians who think mainly about how to win the next election and stay in power.

    Hence, the growing acceptance of easy fiscal policy should be positive for gold prices, especially considering that it will be accompanied by an accommodative monetary policy. Such a policy mix should increase the public debt and inflation, which could support gold prices. The caveat is that investors have so far welcomed more stimulus flowing from both the Fed and the Treasury. But this “go big” approach of Powell and Yellen increases the longer-term risk for the economy, which could materialize – similar to the pandemic – sooner than anyone thought.

    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 April 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 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: Effective Investment through Diligence & Care.

    -----

    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 Rates Rally Further, Pushing Gold Down?

    April 16, 2021, 10:23 AM

    The recent rally in the bond yields pushed gold prices down, but this trend won’t continue forever, as the Fed will likely be forced to step in.

    In March, we saw a continuation of the rally in bond yields that started in February. As the chart below shows, the 10-year real interest rates have soared from -1.06 on February 10 to -0.66 percent on March 23.

    What is clear from the chart is the strong correlation between the 10-year TIPS yields and the gold prices. As a consequence, the rising bond yields made gold struggle. However, in March, the real interest rates were much more choppy compared to February, when they surged decisively. It may signal a lack of fuel for the further rally, at least for a while.

    Now, what is important here is that despite the recent jump in the real yields, they remain extremely low from the historical point of view. And they remain well below zero! This is good news for the gold market, as the yellow metal shines the most when real interest rates are negative.

    Of course, the direction of change is also very important, not just the absolute level. So, the question is, will the rates increase further? Well, it’s unfortunately possible, as the improving economic outlook and risk appetite are encouraging investors to buy stocks rather than bonds.

    On the other hand, the rising inflation expectations suggest that real yields may struggle to increase further, or they actually may go down. As the chart below shows, the market expectations of inflation in the next 10 years, derived from the Treasuries, have risen from 0.50 at the bottom in March 2020 to 2.31 on March 24, 2021.

    Given the increase that has already taken place, the further rise may be limited. But the broad money supply is still rising at an accelerating pace, and investors still don’t believe that the Fed will not hike the federal funds rate to combat rising inflation. They don’t buy the new monetary framework and all the talking about letting inflation overshoot the Fed’s target. Of course, the promise to be irresponsible in the future is not very credible, but investors shouldn’t underestimate the recklessness of central bankers.

    You see, we live in an era of weak policymakers unable to make serious commitments, or take unpopular actions, contrary to the needs of Wall Street and the government. For example, Janet Yellen, as a Treasury Secretary, should stress fiscal discipline – instead, she praised the “go big” approach of the new administration. Congress has already passed the $1.9 trillion fiscal stimulus and the next additional spending is coming. The legislative proposal of new government expenditures on infrastructure and other priorities (such as climate change and the labor market) could collectively cost more than $3 trillion.

    It’s true that the additional government spending and the necessary borrowing could push up the yields (this is an important downward risk for gold). But rising interest rates could hamper the economic recovery and make government financing more costly, further ballooning already mammoth fiscal deficits. So, the Fed will likely have to step in and expand its quantitative easing program or introduce other measures, such as the yield curve control, to curb the long-term interest rates. It will weaken the dollar, thus supporting gold prices.

    As a reminder, the Bank of Japan has started to target the yield on 10-year government bonds at around zero percent in 2016, as it decided that the rapid monetary base expansion via large-scale asset purchases was unsustainable. More recently, the European Central Bank has announced in March the acceleration in the pace of its QE in a response to the rally in bond yields.

    So, do you really think that the Fed won’t follow suit? That Powell will not help Yellen, his former boss from the Fed? The sharp increase in yields would be inconsistent with the Fed’s dovish policy and the overall debt-driven economic growth. Hence, if the interest rates increase too much, be sure that the Fed will do something, providing a long-awaited support for the price of gold.

    What is “too much”? Not so much, at least not in the debt-trap we live in. Some analysts believe that this could occur if nominal 10-year Treasury yields rise over 2 percent, not too far from the current levels, as one can see in the chart below.

    Should we be surprised, given the bond bubble created by the central banks? They have kept the bond yields artificially depressed for years, so even a modest normalization – perfectly justified by the expectations of economic recovery and rising inflation – could collapse the house of cards and cause a financial crisis. Hence, although markets have become more optimistic recently, I’m afraid that bears and black swans haven’t said the last word yet. And neither has 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 April 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 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: Effective Investment through Diligence & Care.

    -----

    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 Upcoming Inflation Take Gold With It?

    April 9, 2021, 9:48 AM

    Inflation is coming. Gold may benefit from it, especially if inflation turns out to be more long-lasting than central bankers and markets believe.

    Brace yourselves, inflation is coming! Importantly, not only grumblers such as myself are talking about rising prices right now, but even the Fed officials themselves admitted that inflation will jump this year. Indeed, in the latest dot plot, the Federal Open Market Committee (FOMC) expects that the PCE annual percent change will soar from 1.3 percent in December 2020 to 2.4 percent at the end of this year. Importantly, their projections increased significantly in the last three months when they amounted to 1.8 percent.

    And remember, we are talking here about the official inflation figures. The real inflationary pressure, which also affects asset prices, is much stronger. Furthermore, the pandemic changed the composition of consumption, as people are buying more goods and less services. And guess what, the prices of goods are rising more than the prices of services, so many people’s actual consumption baskets have become more expensive than official ones, implying that true inflation is higher than the officially reported one, as the IMF has recently admitted.

    Does this mean that the FOMC members have all suddenly become monetary hawks worried about higher inflation? Not at all. The Fed believes that inflation will be temporary, caused by the base effects (very low inflation readings in the second quarter of 2020) and by the reopening of the economy that will trigger higher consumer spending and some increases in prices.

    The U.S. central bank might be right. After all, there will be some temporary forces at play. There always are, but – oh, what a funny thing! – the Fed always cites “transient effects on inflation” when it’s increasing, but not when it’s declining. The problem is, however, that the markets don’t believe the U.S. central bank. Please take a look at the chart below, which displays inflation expectations over the next five and ten upcoming years.

    As you can see, both medium-term and long-term inflation expectations have significantly increased in the last few months. It means that investors don’t only expect a temporary rise in inflation – on the contrary, they forecast a more persistent increases in prices. Indeed, Mr. Market believes that inflation will be, on average, 2.5 percent in the next 5 years and almost 2.3 percent in the next 10 years, significantly above the Fed’s target of 2 percent.

    Of course, it might be the case that Mr. Market is wrong, and Mr. Powell is right. But what is disturbing is the Fed’s confidence – or, rather overconfidence – that it can contain inflation if it turns out to be something more than only a temporary phenomenon. Such a conceit led to stagflation in the 1970s. Gold shined at that time.

    Then, as today, the central bank focused more on the maximum employment than inflation, believing that it can always control the latter by raising the federal funds rate if necessary. But, as Robert J. Barro, from Harvard University, points out, “the problem is that hiking short-term rates will have little impact on inflation once high long-term expected inflation has taken root.”

    And the recent Fed’s actions, including the new monetary framework, according to which the U.S. central bank tries to overshoot its target for some time, may easily waste the reputational capital that was created by Paul Volcker and de-anchor inflation expectations.

    In other words, a negative shock can be accommodated by the central bank without long-lasting effects, as people understand that it’s a unique one-off event, after which everything will return to normalcy. But the Fed is far from normalizing its monetary policy. On the contrary, it has recently signaled that it wouldn’t raise interest rates preemptively to prevent inflation, as it could hamper the economic recovery. The risk here is that if people start to view exceptional as the new normal, their inflation expectations could shift, and become unanchored.

    To sum up, it might be the case that markets are overstating short-term inflation risks. But it’s also possible that politicians and central bankers understate the longer-term inflationary dangers, as Kenneth Rogoff, also from Harvard University, argues. After all, unlike in the aftermath of the Great Recession, when only the monetary base skyrocketed, the pace of growth of the broad money supply also soared this time – and it’s still increasing, as the chart below shows.

    In other words, while all the created liquidity after the global financial crisis of 2007-2009 flowed mainly into the financial markets, during the pandemic, it flowed into the real economy to a much larger extent, which can create more inflationary pressure.

    What’s more, the easy monetary policy is now accompanied by a very loose fiscal policy and the unprecedentedly large fiscal deficits, which could push the economy deeper into the debt trap. This could undermine the central-bank independence and prevent a timely normalization of interest rates, not to mention the weakening of globalization’s downside impact on inflation, caused partially by demographic factors and reshuffling in supply chains. Last but not least, the rising commodity prices and international transport costs, accompanied by the weakening U.S. dollar, may be harbingers of an approaching inflation monster.

    What does it all mean for the gold market? Well, the jump in inflation in 2021 should be positive for the yellow metal, which could gain as an inflation hedge. The downward pressure on the real interest rates should also be supportive for gold prices, although the rally in the bond yields may counteract this effect. But if Powell is right and inflation turns out to be only temporary, then gold may be hard hit, and we could see a goldilocks economy again (i.e., fast economic growth with low inflation). However, if markets are right, or if the long-term inflationary risks materialize, which even investors may understate, gold 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 April 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 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: Effective Investment through Diligence & Care.

    -----

    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 Silver the New Gold?

    March 26, 2021, 8:56 AM

    Many analysts expect silver to outperform gold this year. It’s possible, but investors shouldn’t count on improving economic conditions and industrial demand.

    Silver has recently become a hot investment theme. For months, if not years, some analysts claimed that silver is undervalued relative to gold. Then, at the beginning of 2021, Reddit revolutionaries tried to trigger a short squeeze in silver. Although that attempt failed, silver has, so far, clearly been outperforming gold this year, as the chart below shows. So, is silver now a better investment than gold?

    Well, why would it be? After all, many investors buy silver for the same reasons that they purchase gold – it’s a rare, monetary metal which may be used as an inflation hedge, a safe-haven asset against tail risks, or a portfolio diversifier. It’s just cheaper than gold – and this is why it’s often called the poor man’s gold.

    Indeed, silver has a very high positive correlation with gold. Just take a look at the chart below, which illustrates the movement of gold and silver prices since April 1968. The shapes of the lines are very similar and the correlation coefficient is as high as 0.90!

    On the other hand, silver may indeed outperform gold. After all, silver has a dual nature. It is not only a monetary asset – like gold – but also an industrial commodity. This implies that silver is more business cycle-sensitive than gold. Therefore, given that the global economy is recovering from the deep recession caused by the coronavirus pandemic and the Great Lockdown, silver may outperform gold. In other words, although both gold and silver could benefit from reflation during the recovery, improving economic conditions could support the latter metal more.

    Another argument for silver shining brighter than gold in 2021 is the historical pattern according to which silver prices tend to follow gold prices with some lag, just to catch up with them later – often overreacting compared with gold’s behavior.

    So much for theory. Let’s move on to the data now and analyze the previous economic crisis, i.e., the Great Recession, and the following recovery. As the chart below shows, both metals moved generally in tandem, however, silver was more volatile than gold.

    For example, from its local bottom in mid-2007 to its local peak in early 2008, silver rose 79 percent, while gold “only” 57 percent. Then, in the first phase of the global financial crisis, silver plunged 58 percent (from $20.92 to $8.88), while gold slid 30 percent (from $1011.25 to $712.5). Subsequently, silver skyrocketed 448 percent, reaching a peak of $48.7 in April 2011. Meanwhile, the price of gold reached its peak of $1875 a little bit later, in September 2011, gaining 166 percent. Finally, silver plunged 46 percent by the end of 2011, while gold dropped only 19 percent. This shows that the economic recovery and industrial revival that followed the Great Recession didn’t help silver to shine. Actually, the bluish metal underperformed gold.

    Similarly, silver plunged more than gold (25 versus 17 percent) in the run-up to the burst of the dot-com bubble, as one can see in the chart below. It also gained less than gold in the aftermath of the 2001 recession (25.4 versus 27.5 percent), and then it plunged in the third quarter of 2002, significantly underperforming gold.

    Therefore, the recent history doesn’t confirm the view that silver should be outperforming gold in the early stages of a recovery, because it’s an industrial commodity that benefits from improving economic conditions. Silver was never in a bullish mode when gold was in a bear market, and it rather tends to rally rapidly in the late stage of the commodity cycle, like in the 2000s.

    Actually, one can argue that silver has the best period behind itself. After all, it soared 141 percent from late March to September 2020, while gold rallied “only” 40 percent. So, it might be the case that the catch-up period, in which silver outperforms gold, is already behind us. Indeed, as the chart below shows, the gold-to-silver ratio has recently declined to a more traditional range of 60-70.

    This, of course, doesn’t mean that silver cannot rise further. However, it seems that the metal has already caught up somewhat with its more precious cousin. So, it’s possible that silver can outperform gold in 2021, as Biden’s focus on renewable energy may help silver – as a major part of the metal used in industry is now linked to solar panels and electronics, but history teaches us that investors shouldn’t count on industrial demand. Silver didn’t outperform gold during recoveries from the previous recessions. Although silver has a dual nature, its price is highly correlated with gold prices. Therefore, macroeconomic factors, such as the U.S. dollar, real interest rates, risk appetite, inflation, public debt, monetary policy, fiscal policy, etc., should have a stronger impact on silver than industrial demand. As always, those entering the silver market should remember that silver price movements are more violent than in the gold market.

    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 March 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: Effective Investment through Diligence & Care.

    -----

    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 Trump-Biden Twin Deficit Support Gold?

    March 22, 2021, 12:23 PM

    Twin deficits could negatively affect the U.S. economy, thereby supporting the yellow metal.

    Twins. Many parents will tell you that they double the blessing. But economists would disagree, claiming that twins – i.e., twin deficits – could be negative for the economy. The recent deterioration in the U.S. current account and fiscal balance has sparked renewed debate over the twin deficit and its impact on the exchange rate – and the price of gold.

    A twin deficit occurs when large fiscal deficits coexist with big trade deficits. The former happens when the government spends more money than it raises with taxes, while the latter is the result of imports exceeding exports. A historical example of the U.S. twin deficit occurred in the 1980s, when a significant expansion in the federal budget deficit accompanied a sharp deterioration in the nation’s current account balance. According to the Institute for International Economics’ report, “from 1980 to 1986, the federal budget deficit increased from 2.7 percent of GDP to 5 percent of GDP ($220 billion) and the current account deficit increased from 0 to 3.5 percent of GDP ($153 billion).”

    Another example might be the 2000s. According to the New York Fed’s research paper, from 2001 to 2005, the U.S. current account and fiscal balances plunged by 3 and 4 percent of GDP, respectively. So, there is some correlation between these two. And some economists even believe that there is a causal relationship, i.e., that increases in budget deficits cause an increase in current account deficits. The link is believed to work as follows: higher deficits increase consumption, so imports expand and the trade deficit widens. However, both deficits actually have a common root: the increase in the money supply. When the Fed creates money ex nihilo to monetize the federal debt, it enables America to both borrow and consume more goods from abroad.

    Regardless, in absolute terms, these old twin deficits were miniscule compared to the current one. As the chart below shows, the U.S. current account deficit (green line) has expanded significantly under Trump (despite all the trade wars!) and is approaching the historical record of $800 billion seen in 2006.

    But what happened to the U.S. trade deficit is nothing compared to the fiscal deficit! As you can see in the chart above, it ballooned from $984 billion in fiscal year of 2019 to $3.1 trillion in 2020!

    So, if we simply add these two deficits together, we will see that that the U.S. twin deficits have reached a record level. As the chart below shows, it has expended from $850 billion in 2014 to $3.8 trillion in 2020!

    Now, the question is how the twin deficits could affect the price of gold. Well, from looking at the chart above, it’s hard to tell. Gold rallied in the 1970s, when the twin deficit was miniscule, while it entered a bear phase when the twin deficit started to increase. However, the yellow metal skyrocketed both in the 2000s and in the 2020s, when the twin deficit ballooned.

    The key issue is what distinguishes the 1980s from the 2000s (and 2020)? I’ll tell you. In the former period, expansionary fiscal policy coincided with tight monetary policy. In consequence, the real interest rates increased, which encouraged capital inflows and strengthened the U.S. dollar. So, gold was melting.

    Luckily for the yellow metal, this time, the easy fiscal policy is accompanied by the accommodative monetary policy. The Fed has already slashed the federal funds rate and it’s conducting quantitative easing to suppress the bond yields. Actually, some analysts believe that the U.S. central bank will implement the yield curve control to prevent any significant increases in the interest rates.

    Hence, the combination of American monetary drunkenness and fiscal irresponsibility that largely contributed to the great expansion in the twin deficits should result in the weakening of the greenback. This, at least, is what we observed in the 2000s, as the chart below shows.

    And this depreciation of the U.S. dollar should ultimately support gold prices, especially if we see reflation and the next commodity boom. It’s true that since its peak in August 2020, gold has been positively correlated with the greenback, but the inverse relationship can be restored one day. Investors shouldn’t forget that the dollar is not the only driver of gold prices – other factors also play a role. In the second half of the past year, both the real yields and the risk appetite increased, which outweighed the impact of the weakening dollar. Luckily, the Fed is ready to prevent any significant upward pressure on the Treasury yields coming from the twin deficits. That’s good 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 March 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: Effective Investment through Diligence & Care.

    -----

    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 Dollar’s Weakness Giving Way to Gold?

    March 12, 2021, 11:09 AM

    Since its peak in the spring of 2020, the U.S. dollar index has lost almost 12 percent, and it could decline even further, thus supporting gold prices.

    There is a weakness in the U.S. dollar. Let’s start off by taking a look at the chart below. As you can see, the broad trade-weighted dollar index has been declining recently. Since its peak in late March 2020, the greenback has lost almost 12 percent.

    Not surprisingly, some analysts argue that the American currency has entered a multi-year bear market, with more declines on the horizon. Are they right? And what would that imply for gold?

    Well, there are strong arguments for the bearish performance of the greenback. The confidence in the U.S. dollar is waning. To be clear, I don’t predict the collapse in the greenback anytime soon. I’ve been hearing the rumors about the dollar’s death for years – and they are often exaggerated. The truth is that the greenback remains the least ugly sister of the fiat currencies. And it’s dominance is overwhelming: the U.S. dollar’s share of currency reserves reported to the IMF was 60.4 percent in Q3 of 2020, while the share of the euro, the second most important reserve currency, was only 20.5 percent.

    However, the share of the U.S. dollar has declined from 64.7 percent in the first quarter of 2017. It seems that Trump’s trade sanctions and ambiguous stance towards U.S. allies have pushed them to reduce their exposure to the American currency. No one wins trade and currency wars. In addition, in October 2020, the greenback ceased to be the world’s most used global payments currency, falling behind the euro for the first time since August 2013.

    And the recent update to Tesla’s investment policy, which enables Musk’s firm to hold part of its cash holdings in cryptocurrencies and gold, is a clear sign the big companies are losing some confidence they previously had in the U.S. dollar. Indeed, sentiment is clearly bearish, as bets against the dollar have recently risen to nearly their highest level in a decade.

    The negative sentiment may of course, be excessive, especially given the fact that the American economy would probably, as always, recover quicker than its European and Japanese peers. However, there are important headwinds against the buck. First of all, the Fed aggressively slashed interest rates and expanded its balance sheet, thus having its monetary policy resemble the ridiculously dovish stance of the ECB and the Bank of Japan. The U.S. central bank also become more tolerant toward higher inflation, so it’s going to leave the federal funds rate at or near zero for years.

    Second, the Fed’s recent dovishness is accompanied with the expansion of the fiscal deficits. The explosion in the U.S. debt and in the broad money supply has significantly increased the supply of dollars, making their value decline. The lavish fiscal policy not only ballooned the public debt, but it also contributed to the large twin deficits, i.e., the simultaneous fiscal deficits and the nation’s current account deficits. As a reminder, the twin deficit that President Bush triggered in the 2000s reduced investors’ confidence in the American economy and its currency. Hence, it contributed to the bull market in gold.

    And the same may occur this time. After all, a twin deficit means that more dollars are being printed and moved abroad. In contrast, the EU runs a huge current account surplus, so there is an inflow to the euro through foreign trade.

    Third, with an economic recovery from the pandemic, the risk appetite has been increasing. Such a “risk on” environment has been historically negative for the greenback, as capital flows into more risky emerging markets.

    So, the black clouds over the dollar should be fundamentally positive for gold prices, as the yellow metal is often negatively correlated with the greenback. This is an important difference between 2011 and 2020. As the chart below shows, the American currency bottomed out in the summer of 2011, starting its multi-year bull market.

    If this scenario replays, it would be, of course, bad for gold. But the above presented arguments show that the bull market in the U.S. dollar being similar to that of 2011-2020 is unlikely. And the euro doesn’t suffer from a similar crisis as it did in 2010-2012.

    The bearish case for a dollar is also supported by the The Economist’s Big Mac Index, as only three currencies are now overvalued against the U.S. dollar, which suggests that there is more room for declines in the greenback’s value. Indeed, in 2009-2011, the American currency weakened more than 19 percent, while now it hasn’t weakened by even 12 percent! The continuation of the bear market in the U.S. dollar should be supportive for the yellow metal, especially if the weaker greenback will be accompanied by a slide in 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 March 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: Effective Investment through Diligence & Care.

    -----

    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 Now Replaying 2010-2012?

    March 9, 2021, 8:37 AM

    The 2019-2021 gold chart is disturbingly similar to that of 2010-2012, but it does not have to be the harbinger of a bear market.

    Many ancient cultures saw history as cyclical. According to this view, society passes through repeated cycles. Can this apply to gold as well? I’m not referring here to the simple fact that we have both bull and bear markets in the precious metals – I refer here to the observation that gold’s price pattern seen in 2019-2021 mirrors that of 2010-2012. Please take a look at the chart below.

    As you can see, in both periods, gold was steadily rising to a peak in the third quarter of the second year. A decade ago, the yellow metal gained 29 percent in 2010 and 74 percent as it hit the top. Then, it declined 19 percent by the end of 2011. Fast forward to more recent times. Gold gained 18.4 percent in 2019 and 62 percent at the peak. Afterwards, it declined 9 percent by the end of 2020.

    So, although the magnitude has now been weaker than in the aftermath of the Great Recession, the pattern is quite similar. The next chart – which presents the normalized gold prices in both periods to indices (when the starting point equals 100) – nicely illustrates how gold in 2019-2021 closely resembles gold from 2010-2012.

    This similarity may be disturbing. Should the pattern hold, then gold could go down significantly and stay in a sideways trend for years. As a reminder, this is what happened a decade ago. Gold bulls fought until the end of 2012, when they gave up and the yellow metal entered a full bear market, plunging 45 percent from the top to the bottom in December 2015. Then, it stayed generally flat till the end of 2018. If this cycle replays, we could see the price of gold go below $1,200 by the end of 2024.

    To be clear, there are some arguments to support the bearish case. Just as in the 2010s, the world is recovering now from the global economic crisis. The recession is over and the prospects are only better. Perhaps they’re not rosy, but they’re certainly better than many previously expected, which is what matters for the financial markets. As the worst is behind us, the risk appetite is returning, which could put gold and other safe-haven assets into oblivion. Actually, some could even argue that gold may now plunge even earlier, as a decade ago it was supported by the European sovereign debt crisis, which peaked in 2011-2012.

    However, there are also important reasons why gold could break the pattern and diverge from the 2010-2012 trend. First, we now have a much more dovish Fed. The U.S. central bank slashed the federal funds rate much quicker and expanded its balance sheet more decisively. Additionally, to avoid a taper tantrum caused by its announcement about tapering asset purchases, this time the Fed will normalize its monetary policy in a very, very gradual way, if at all. It means that interest rates will stay lower for longer. Lastly, the U.S. central bank changed its monetary policy framework, i.e., it prioritized the labor market over price stability and became more tolerant to higher inflation.

    Second, we also have a much easier fiscal policy. Even before the global pandemic, Trump significantly expanded budget deficits, but the Great Lockdown made them even larger. As pundits believe that the fiscal response in the aftermath of the global financial crisis of 2007-2009 was too small, they now want to go big – indeed, Biden’s $1.9 trillion economic plan is waiting to be passed by Congress.

    Third, this recovery might be more inflationary than a decade ago. This is because not only did the monetary base increase, but the broad money supply did as well. Last time, the Fed injected a lot of liquidity to the banking sector to bailout the banks. Now, the money has flowed much more through Main Street and the household sector, which could turn out to be more inflationary when all this money will be spent on goods and services. Also, last time we observed some deleveraging in the private sector, while now the supply of loans is continuously increasing at a positive rate. We are also already observing reflation in the form of a commodity boom, so gold may follow suit.

    To sum up, the patterns seen in the gold market in 2010-2012 and 2019-2021 are remarkably similar. So, the recent gold’s weakness may be really disturbing. However, this resemblance does not have to be a harbinger of further problems coming for gold bulls. After all, as Mark Twain is reputed to have said, “history doesn’t repeat itself, but it often rhymes”. Indeed, the macroeconomic and political environment is now clearly different than a decade ago – it’s more fundamentally positive for the price of 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 March 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: Effective Investment through Diligence & Care.

    -----

    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 There Be Roaring Twenties for Gold?

    February 26, 2021, 10:40 AM

    The 2020s might be less roaring than the 1920s, which seems like good news for gold.

    The United States is strongly polarized, with blue versus red, liberals versus conservatives, and so on. People are divided along many lines, but the biggest division line is between those who count decades from 0 to 9 and those who count them from 1 to 10. It is intuitive for many people to adopt the first method, especially that we think of decades as ‘the 20s’, ‘the 30s’, and so on. However, the catch is that there was no Year Zero, so the first decade of the common era was years 1 to 10. Following this logic, the current decade started on January 1, 2021, not January 1, 2020.

    So, I feel fully entitled to investigate how gold will behave in the new decade. The issue is especially interesting as some analysts claim that we are entering the Roaring Twenties 2.0. Are they correct?

    On the surface, there are some similarities. The 1920s were a decade that followed the nightmare of World War I and the Spanish Flu pandemic. It was a time of quick economic growth (the U.S. GDP grew more than 40 percent in that period) and rapid technological innovation fueled predominantly by the rising access to electricity and big improvements in transportation (automobiles and planes).

    Fast forward one century and we land in the 2020s, which is a decade following the nightmare of the coronavirus pandemic. There are hopes for an acceleration in technological progress driven mainly by the rising scope of remote work, digital solutions, cloud computing, artificial intelligence, Internet of Things, 5G networks, robotization, super-batteries, electric vehicles, and so on. And given the pent-up demand and months spent in lockdowns, consumers are ready to congregate and spend!

    However, there are good reasons to be skeptical about the narrative of the Roaring Twenties 2.0. The era of post-war prosperity was fueled by the return to the normalcy in the sphere of economic policy. I refer here to the fact that after WWI, there was a successful transition from a wartime economy to a peacetime economy. In contrast, in the aftermath of the Great Recession, there is a gradual transition from the peacetime economy to a wartime economy, that was only accelerated during the epidemic and the Great Lockdown.

    In particular, both the government spending and the fiscal deficits were sharply reduced in the post-war era. In consequence, the U.S. public debt declined, especially in real terms. Similarly, the Fed reversed its monetary policy and allowed for monetary contraction (and quick recession) in 1919-20 to reverse wartime inflation.

    In other words, the tighter monetary and fiscal policies led to an environment of economic prosperity. Also helpful for the U.S. were developments such as trustbusting and an economic recovery in Germany after its hyperinflation – all developments that will not replay in the 2020s.

    In contrast, neither the fiscal policy nor the monetary policy are going to normalize anytime soon, even if the COVID-19 pandemic is brought under control. The national debt has risen by almost $7.8 trillion under Trump’s presidency – a level that rivals Italy’s. The debt-to-GDP ratio has soared, as the chart below shows. And Joe Biden doesn’t worry about deficits – instead, with his plan of $1.9 trillion economic stimulus, he is going to balloon the public debt even further by increasing government spending.

    But maybe we shouldn’t worry about the debt? After all, after WW2, the public debt was even higher, but the economy didn’t collapse – actually, it grew so rapidly that the debt-to-GDP ratio diminished significantly. Yup, that’s correct, but after the pandemic, the economy will not recover as quickly as in the aftermath of WW2. Oh, and by the way, the economy grew its way out of debt only thanks to several years of high inflation.

    Therefore, the current complacency and naïve belief in low-interest rates and debt-driven economic recovery makes the scenario of the Roaring Twenties 2.0 not very likely, despite all the fantastic technological progress we are observing. So, instead of acceleration, we could rather observe an economic slowdown due to the poor economic policy that hampers the expansion of the private sector. Indeed, the recent report by the World Bank warns about the lost decade: “If history is any guide, unless there are substantial and effective reforms, the global economy is heading for a decade of disappointing growth outcomes.” This is good news for the gold market.

    But even if the Roaring Twenties 2.0 do happen, it wouldn’t have to be very bad for the yellow metal. It’s true that the 1920s was a period of wealth, prosperity, and decadence in which people didn’t think about preserving capital and investing in safe-haven assets such as gold. In contrast, there was a lot of risk-taking fueling the boom in the stock market. However, the Roaring Twenties were an inflationary period of debt-driven growth that ended in the systemic economic crisis called the Great Depression – and gold can shine in such an macroeconomic environment.

    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 February 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: Effective Investment through Diligence & Care.

    -----

    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 Biden Overheat the Economy and Gold?

    February 19, 2021, 6:47 AM

    Under the Biden administration the economy could overheat, thereby increasing inflation and the price of gold.

    In January, Biden unveiled his plan for stimulating the economy, which is struggling as the epidemic in the U.S. continues to unfold. Pundits welcomed the bold proposal of spending almost $2 trillion. Some expenditures, especially on vaccines and healthcare, sound pretty reasonable. However, $1.9 trillion is a lot of money! And a lot of federal debt, as the stimulus would be debt-funded!

    So, there is a risk that Biden’s package would overheat the economy and increase inflation. Surprisingly, even some mainstream economists who support the deficit spending, notice this possibility. For instance, former Treasury Secretary Larry Summers, said that Biden’s stimulus could lead the economy to overheat, and that the conventional wisdom is underestimating the risks of hitting capacity. Although he doesn’t oppose the idea of another stimulus, Summers noted that “if we get Covid behind us, we will have an economy that is on fire”.

    Indeed, this is a real possibility for good reasons. First, the proposed package would not only be large in absolute terms (the nominal amount), but also relative to the GDP. According to The Economist, Biden’s proposal is worth about nine percent of pre-crisis GDP, nearly twice the size of Obama’s aid package in the aftermath of the Great Recession.

    And the stimulus is also large relative to the likely shortfall in the aggregate demand. I’m referring here to the fact that the winter wave of the coronavirus would be less harmful for the economy – and that there have already been big economic stimuli added last year, including a $900 billion package passed no earlier than in December.

    Oh yes, politicians were really spendthrift in 2020, and – without counting the aid passed in December – they injected into the economy almost $3 trillion, or about 14 percent of pre-crisis GDP, much more than the decline in the aggregate demand. In other words, the policymakers added to the economy more money that was destroyed by the pandemic.

    But the tricky part is that Americans simply piled up most of this cash in bank accounts, or they used it for trading, for instance. Given the social-distancing measures and limited possibilities to spend money, this outcome shouldn’t actually be surprising. However, the hoarding of stimulus shows that it has not yet started to affect the economy – but that can change when the economy fully reopens and people unleash the hoarded money. If all this cash finally reaches the markets, prices should go up.

    You see, the current economic downturn is unusual. It doesn’t result from the fact that Americans don’t have enough income and cannot finance their expenditures. The problem is rather that people cannot spend it even if they wanted to. Indeed, economic disruption and subdued consumer spending are concentrated in certain sectors that are most sensitive to social distancing – such as the leisure, transport and hospitality industries – rather than spread widely throughout the whole economy. So, when people will finally be able to spend, they will probably do so, possibly accelerating inflation.

    As well, normally the Fed would tighten its monetary policy to prevent the rise in prices. But now the U.S. central bank wants to overshoot its inflation target, so it would not hike interest rates only because inflation raises to two percent or even moderately above it.

    Another potential inflationary driver is dollar depreciation, which seems likely, given the zero-interest rates policy and the expansion in the U.S. twin deficit.

    Hence, without the central bank neutralizing the fiscal exuberance, it’s possible that Biden’s plan would overheat the economy, at least temporarily. Of course, that’s not certain and given the small Democrats’ majority in Congress, the final stimulus could be lower than the proposed $1.9 trillion. But it would remain large and on top of previous aid packages and pent-up demand, which makes the overheating scenario quite likely.

    Actually, investors have already started to expect higher inflation in the future – as the chart below shows, the inflationary expectations have already surpassed pre-pandemic levels.

    From the fundamental perspective, this is good news for the gold market. After all, gold is bought by some investors as an inflation hedge. Moreover, the acceleration of inflation would lower real interest rates, keeping them deeply in negative territory, which would also be positive for the yellow metal.

    So, although the expectations of higher fiscal stimulus plunged gold prices in January, more government spending – and expansion in budget deficits and public debt – could ultimately turn out to be supportive factors for gold. Especially if easy fiscal policy will be accompanied by the accommodative monetary policy – in particular quantitative easing and a rising Fed’s balance sheet – and inflation.

    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 February 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: Effective Investment through Diligence & Care.

    -----

    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 the Pandemic Winter

    February 12, 2021, 8:17 AM

    The pandemic winter will take longer than we thought. The longer we struggle with the coronavirus, the brighter gold could shine.

    A long, long time ago, there was a bad virus, called the coronavirus, that killed many people all around the world and severely hit the global economy. Luckily, smart scientists developed vaccines that defeated the coronavirus and ended the pandemic. Since then, humankind lived happily – and healthy – ever after.

    Sounds beautiful, doesn’t it? This is the story we were all supposed to believe. The narrative was that the development of vaccines would end the pandemic and we would quickly return to normalcy. However, it turns out that this was all a fairy tale – the real struggle with the coronavirus is more challenging than we thought.

    First, the rollout of vaccinations has been very, very slow. As the chart below shows, on February 1, 2021, only about 1.77 percent of Americans became fully vaccinated against COVID-19.

    Of course, full protection requires two doses, so it takes some time. But in many countries, the share of the population which received at least one dose of the vaccine is also disappointingly low, as the chart below shows.

    It means that our progress towards herd immunity is really sluggish. At such a pace, we are losing the race between injections and infections. And we will not reach herd immunity until the second half of the year or even the next winter…

    Second, there is the problem of mutations. The new strains are rapidly popping up which poses a great risk in our fight with the coronavirus. One of these new variants was identified in the United Kingdom and quickly spread through the country. Although it’s not more lethal, it’s more infectious, which makes it more dangerous overall. And the more variants emerge, it’s more likely that we could see a mutation resistant to our current treatments and vaccines. Indeed, some of the mutations change the surface protein, spike, and have been shown to reduce the effectiveness of combating the coronavirus by monoclonal antibodies.

    The really bad part is that these two problems are strongly connected. The longer the vaccinations take, the more active cases we have. The more active cases we have, the more mutations happen, as each new infection implies more copies of the coronavirus, which gives it more chances to mutate. The more mutations occur, the higher the odds of a really nasty strain. Therefore, the longer the vaccination process takes, the more probable it is that it will not work and that vaccine-resistant variants might emerge.

    Given that in many countries vaccinations are practically the only rational strategy to fight the virus, the vaccine-resistant strain would be a serious blow. Surely, some vaccines could be relatively easily updated, but their rollout would still require time – time we don’t have.

    What does it all imply for the gold market? Well, the more sluggish the vaccinations, the higher the risk that something goes wrong and that our battle with COVID-19 will take more time. The longer the fight, the slower the economic recovery. The longer and bumpier road toward herd immunity, the slower lifting sanitary restrictions and social distancing measures, and the later we come back to normalcy. The longer we live in Zombieland, the easier fiscal and monetary policies will be, and the brighter gold will shine.

    Another issue is that we shouldn’t forget about the possibility of the pandemic’s long economic shadow. A recent paper has examined the effects of 19 major previous pandemics, finding a long shadow of the economic carnage. Although financial markets are still (wrongly, I believe) betting on a V-shaped recovery, the history suggests that a double dip is likely, as eight of the last 11 recessions experienced it. Recessions sound golden, don’t they?

    However, there is one caveat here. The sensitivity of economic activity to COVID-19 infections and restrictions has significantly diminished since the Great Lockdown in the spring of 2020. There are three reasons for that. First, people fear the coronavirus less. Second, epidemic restrictions are better targeted and implemented. Third, entrepreneurs adopted better to cope with the epidemic.

    The greater resilience of the economy means a smaller downturn and fewer long-term scars, which will limit any upward COVID-19 related impact on gold prices. But a softer economic impact also implies a quicker recovery, which – together with the upcoming big government stimulus – could increase consumer prices, thus supporting gold prices through the inflation channel. Indeed, commodity prices have been surging in 2021, so gold may follow suit.

    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 February 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: Effective Investment through Diligence & Care.

    -----

    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.

  • New POTUS, New Gold Bull Market?

    February 5, 2021, 10:12 AM

    Joe Biden’s election as president and his first economic proposal proved negative for gold prices, but the presidency might yet turn positive.

    The 46th presidency of the United States has officially begun. What does that mean for the U.S. economy, politics and the precious metals market?

    Let’s start by noting that this will not be an easy presidency. The epidemic in the U.S. is raging, the economy is in recession, and public debt is ballooning. Foreign relations are strained while the nation is strongly polarized, as the recent riots clearly showed. So, Biden will have to face many problems, with few assets.

    First, as he turned 78 in November, Biden has been the oldest person ever sworn in as U.S. president. Second, his political capital is rather weak, as the 2020 election is more about Trump’s loss than Biden’s victory. In other words, many of his voters supported Biden not because of his merits but only because they opposed Trump. Third, he will have the smallest congressional majorities in several years. Democrats have only ten more seats than Republicans in the House and the same number of seats in the Senate. And even with Kamala Harris as a tie-breaker, Biden could not lose a single Democrat senator’s vote to pass any legislation in Senate.

    On the one hand, Biden’s tough political position seems to be negative for gold prices, as it lowers the odds of implementing the most radical, leftist political agenda. On the other hand, Biden’s difficulties also lower the chances of sound economic reforms, which is good news for the yellow metal. A divided Congress and Democratic Party with an old president at the helm, who has a weak personal base could result in political conflicts and stalemates which would prove positive for gold.

    When it comes to economics, Biden has already presented his pandemic aid bill, worth of $1.9 trillion. The proposal includes direct payments of $1,400 to households, $400 per week in supplementary unemployment benefits through September, billions of dollars for struggling businesses, schools, and local governments, as well as funding that would accelerate vaccination and support other coronavirus containment efforts. Biden also wants to raise the minimum wage to $15 per hour, which will not appeal to Republicans. The big size of the package will also be disliked by the GOP.

    The fact that Democrats have won the Georgia Senate runoffs, taking control over the Senate, increases the chances that Biden will implement his economic stimulus. The equity markets welcomed the idea of another large aid package, in contrast to bond investors who sell Treasuries, causing the yields to go up. The increase in real interest rates pushed gold prices down, as the chart below shows.

    It seems that investors liked the idea of big stimulus, hoping for acceleration in economic growth. However, printing more money (I know, the Treasury technically doesn’t print money – but it issues bonds which are to a large extent bought by the Fed) and sending checks to people doesn’t increase economic output. Another problem is that the U.S. can’t run massive fiscal deficits forever and ever, hoping that interest rates will always stay low.

    So, although Biden’s economic stimulus may add something to the GDP growth in the short-term, it will not fundamentally strengthen the economy. Quite the contrary, the massive increase in government spending and public debt (as well as in taxation) will probably hamper the long-term productivity growth and make the already fragile debt-based economic model even more fragile. What is really worrisome is that Biden doesn’t seem to care about U.S. indebtedness – he has already spoken strongly against deficit worries and hasn’t proposed any actions to reduce the debt – and plans to unveil the additional economic stimulus.

    Hence, although gold declined initially in a response to Biden’s economic stimulus proposal, the new president could ultimately turn out to be positive for the yellow metal. After all, gold declined in the aftermath of the Lehman Brothers’ collapse, but it shined under Barack Obama’s first presidency. And Biden is likely to be even more fiscally irresponsible than Obama (or Trump), while the Fed under Powell is likely to even more monetarily irresponsible than under Bernanke (or Yellen). Indeed, according to The Economist, Biden’s proposal is worth about nine percent of pre-crisis GDP, nearly twice the size of Obama’s aid package in the aftermath of the Great Recession. And, in contrast to previous crises, the Fed has announced the desire to overshoot its inflation target. All these factors should support gold prices in the long run.

    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 February 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: Effective Investment through Diligence & Care.

    -----

    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 Interest Rate Increase Cause Gold to Plunge in 2021?

    February 4, 2021, 11:15 AM

    The decline in the real interest rates is the most important downside risk for gold. Will it materialize, plunging the price of the yellow metal?

    The rise in inflation is the most significant upside risk for gold this year, but there are also a few important downside risks. The most disturbing for us is the possibility that the real interest rates will increase. Why? Please take a look at the chart below.

    As you can see, there is a strong negative correlation between the real yields and gold prices. When the interest rates go up, the yellow metal falls, and when the rates go down, gold rallies. Indeed, the real interest rates peaked in November 2018 at 1.17 percent, just one month before the last hike in the Fed’s last tightening cycle. Since then, they were falling, reaching their historical bottom below -1.0 percent in the summer of 2020. Not coincidentally, gold was experiencing a bull market during this period, reaching its record high of almost $2010, just when the rates bottomed. And, as the rates normalized somewhat, the price of gold corrected to the level below $1,900.

    Now, the obvious question is whether there is further room for real interest rates to go down. In 2019, they were falling amid the economic slowdown and the dovish Fed cutting the interest rates. Last year, they plunged even further (with a short spike because of the surge in the risk premium), as a result of the COVID-19 related economic crisis and the U.S. central bank slashing the federal funds rate to practically zero.

    However, the Great Lockdown and resulting deep downturn are behind us. When we face the second wave of the pandemic and people become vaccinated, there will be an economic recovery. As well, the Fed has already brought the interest rates to zero – meaning that without the U.S. central bank implementing NIRP, the nominal policy rates reached their lower bound. So, assuming that the Fed will not cut interest rates further and that investors will not expect a further slowing down of the economy, the room for further declines in the real interest rate is limited.

    The only hope lies in the increase in inflation expectations, which is actually quite probable, as I explained in the previous part of this edition of the Gold Market Overview. Given the surge in the broad money supply, the pent-up demand, and some structural shifts, reflation in 2021 is more likely than it was in the aftermath of the great financial crisis.

    However, gold investors should also be prepared for a negative scenario of low inflation. After all, the Fed has repeatedly undershot its annual inflation target. In this case, the real interest rates may stay roughly the same or they could even rise.

    Let’s take a look at the chart below, which shows the gold prices and real interest rates after the Great Recession. In the very aftermath of the Lehman Brothers’ bankruptcy, they surged, but after the panic phases ended, they were falling until the end of 2012, just when, more less, the bear market in gold started.

    Now, somebody could say that the real interest rates were falling for four years until reaching bottom at the end of 2012, so we shouldn’t worry about the normalization of interest rates. However, the COVID-19 related economic crisis was very deep, but also very short. Everything is happening now at an accelerated speed, so we could already be reaching the local bottom in the interest rates (or be close to it).

    Of course, there are important differences between that period and today. First, as I’ve already emphasized, there is now a higher risk of an increase in inflation. Second, in 2013, there was a taper tantrum, while today, the Fed maintains an ultra-dovish stance and does not signal any interest rate hikes in the foreseeable future. Although the U.S. central bank didn’t expand its quantitative easing in December, showing that it feels comfortable with some increases in the bond yields, it’s not going to accept substantial rises in the interest rates. The dovish Fed’s bias is one of the main factors behind the downward trend in the real interest rates (even if they normalize somewhat, they reach further lower peaks and bottoms over time).

    Third, the U.S. dollar looks different. As the chart below shows, the greenback started to appreciate in 2011, pushing gold prices down. But today it is more likely that the U.S. dollar will weaken further due to a changing administration in the White House, the economic stabilization and cash outflows into developing countries, soaring public debts, a zero-interest rate policy, and the risk of an increase in inflation.

    If so, the normalization of the real interest rates (if it happens, which is far from being certain) doesn’t have to plunge the yellow metal. In other words, there are important downside risks to the bullish case for gold this year, but 2021 does not have to look like 2013 in the gold market.

    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 January 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 Inflation Make Gold Shine in 2021?

    January 22, 2021, 9:51 AM

    Inflation will be one of the greatest upside risks for gold this year. Will it materialize and make gold shine?

    The report about gold in 2021 would be incomplete without the outlook for inflation. We have already written about it recently, but this topic is worth further examination. After all, higher inflation is believed to be one of the biggest tail risks in the coming months or years, and one of the greatest upside risks for gold this year.

    Most economists and investors still believe that inflation is dead. After all, the only way to justify the central banks’ unprecedentedly dovish actions is the premise of low inflation. And the only way to justify the buoyant stock market amid the new highs in the number of Americans in hospital with COVID-19 is the expectation of an inflationless economic recovery this year. In other words, many people forecast the return to the Goldilocks economy after the end of the pandemic.

    On the surface, it seems that they might be right. We haven’t seen double-digit inflation since the end of 1981. And last time the CPI annual rate was above 3 percent was in January 2012. Actually, in the last ten years, inflation was below the Fed’s 2-percent target most of the time, as the chart below shows.

    Moreover, the inflation rates dropped significantly during the U.S. epidemic and the Great Lockdown when people distanced socially and limited their spending. So, given the strength of the negative demand shock and the following plunge in inflation, why should we worry about the risk of higher inflation?

    Well, shouldn’t it be obvious after experiencing a pandemic, i.e., an improbable but impactful event? Even a small probability of a surge in inflation should be worrying, especially given the pile of debt and, thus, limited room for central banks to hike interest rates to prevent inflation.

    Moreover, the likelihood of an increase in inflation is not so small. As I’ve explained several times, the case for higher inflation is stronger today than in the aftermath of the Great Recession. The first reason is that the broad money supply has surged. This is because the banks haven’t been hit so far (in contrast to the financial crisis where banks suffered greatly), so they have been lending freely, as the chart below shows.

    Second, in contrast to the previous economic crisis where people did not spend money because they had no income or they decided to repay their debts, this time, people didn’t spend money because they were stuck at home. But when the health crisis is over and people get vaccinated, some consumers may go on a spending spree. The realization of pent-up demand may overwhelm the firms’ capacity, leading to an increase in prices. There are already some signs of bottlenecks, or supply falling behind demand, such as the increase in prices of some commodities like iron ore.

    In other words, when the world returns to normality, the private sector will find itself flush with cash. And I bet that some households will try to make up for all the time not spent in movie theatres, restaurants and hotels during the last year.

    Third, there might also be some structural shifts in the global economy, which will reverse the current disinflationary forces. As Charles Goodhart and Manoj Pradhan argue in their book The Great Demographic Reversal, the era of low inflation, caused by globalization, is now ending. You see, in the 1980s and 1990s, China, India and post-communist countries from Europe and Central Asia, entered the global economy. As a consequence, the global labor supply for production of tradeable goods rose enormously, leading to weak inflationary pressure. But all this is going into reverse. Globalization is now weakening and there are no big countries in the queue to enter the global economy. Actually, ageing in China and other countries reduces the global labor supply, thus strengthening inflationary pressure.

    Last but not least, the politicians and central bankers have become more complacent. The thoughtless and irresponsible stance of politicians is unsurprising, especially given the temptation to inflate away the public debt. However, the central banks also stopped worrying and embraced the inflation bomb. For example, the Fed has changed its monetary regime in 2020, announcing that it would tolerate overshooting of inflation above its target for a undetermined period of time.

    The bottom line is that inflation should return in the coming months (more precisely, in the second half of the year, when the distribution of vaccines will be widespread). We shouldn’t experience double-digit rates, but the markets don’t expect a deflationary crisis either. As the chart below shows, inflationary expectations have already returned to pre-pandemic levels.

    All this is good news for price of gold. The case for reflation in the global economy is definitely stronger than after the global financial crisis of 2007-2009. The present risk of higher inflation should support the demand for gold as a hedge against inflation. And the increase in inflation expectations lowers the real interest rates, thereby positively affecting the yellow metal. Although gold will face some important headwinds this year, inflation expectations are likely to outpace the increase in nominal bond yields, which would put downward pressure on the real interest rates and support 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 January 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.

  • Pandemic 2020 Is Gone! Will 2021 Be Better for Gold?

    January 15, 2021, 5:04 AM

    Hurray! The disastrous year of 2020, which brought about the COVID-19 pandemic, the Great Lockdown, and the economic crisis, is over! Now, the question is what will 2021 be like – both for the U.S. economy and the gold market.

    To provide an answer, below I analyze the most important economic trends for the next year and their implications for the yellow metal.

    1. Society gains herd immunity by vaccination and the health crisis is overcome.
    2. With herd immunity approaching, the social fabric returns to normality, and the economy recovers.
    3. The vaccine rollout increases the risk appetite, reducing the safe-haven demand for both gold and the greenback .
    4. The return to normality and realization of the pent-up demand (comeback of spending that was put on hold during the U.S. epidemic ) accelerates the CPI inflation rate .
    5. The Fed stays accommodative, but the recovery in the GDP growth and the labor market makes the U.S. monetary policy less aggressively dovish than in 2020.
    6. However, the Fed continues to use all of its tools to support the economy in 2021 and, in particular, it does not hike the federal funds rate , even if inflation rises.
    7. As a result, the real interest rates stay at ultra-low levels. However, the potential for further declines, similar in scale to 2020, is limited, unless inflation jumps.
    8. The American fiscal policy also remains easy, although relative to 2020, government spending declines, while the budget deficit narrows as a share of the GDP.
    9. However, the public debt burdens continue to rise. Although the ratio of debt to GDP decreased in Q3 2020 amid the rebound in the GDP, it’s likely to increase further in the future, especially if Congress approves the new fiscal stimulus.
    10. Given the dovish Fed conducting a zero-interest rate policy , increasing debt burden, and strengthened risk appetite amid the vaccine rollout, the U.S. dollar weakens further. The American currency has already lost more than 11 percent against a broad basket of other currencies since its March peak.

    What does this macroeconomic outlook imply for the gold prices? This is a great question, as some of the trends will be supportive for the yellow metal, while others might constitute headwinds, and some factors could theoretically be both positive and negative for the price of gold. For instance, the end of the recession seems to be bad for the yellow metal, but gold often shines during the very early phase of an economic recovery, especially if it is accompanied by reflation, i.e., a return of inflation.

    The tailwinds include the continuation of easy monetary and fiscal policies. The federal debt will remain high, while the interest rates will stay low, supporting the gold prices, as was the case in the past (see the chart below).

    There is also an upward risk of higher inflation. In such a macroeconomic environment, the U.S. dollar should weaken against other currencies, thus supporting gold prices. As a reminder, the relative strength of the greenback in recent years (see the chart below) limited the gains in the precious metals market.

    However, there are also headwinds. You see, levels are significantly different concepts than changes. The latter often matter more for the markets. What do I mean? Well, although both monetary and fiscal policies will remain accommodative, they will be less accommodative than in 2020. Although the real interest rates should stay very low, they will not decline as much as last year (if at all).

    In other words, the economy will normalize this year after suffering a deep downturn in 2020, so the economic policy will be less aggressive. Hence, the level of bond yields and the ratio of federal debt to GDP should stabilize somewhat – actually, thanks to the rebound in the GDP in the third quarter of 2020, the share of public indebtedness in the U.S. economy has decreased, as the chart below shows.

    Hence, although the price of gold could be supported by the continuation of easy monetary and fiscal policies, low real interest rates, and weak dollar, it’s potential to rally could be limited. The accommodative stance of central banks and unwillingness to normalize the monetary policy for the coming years should prevent a significant bear market in gold, but without any fresh triggers of further declines in the bond yields or without the spark of inflation, the great bull market is also not very likely. So, unless we either see a serious solvency crisis or sovereign debt crisis, or an substantial acceleration in inflation, gold may enter a sideways trend. Or it can actually go south, if it smells the normalization of monetary policy or increases in the 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 January 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.

  • The Gold Market in 2020 and Beyond

    January 8, 2021, 11:12 AM

    Was the past year good for the yellow metal? What happened in 2020 and what will 2021 be like for the gold market?

    Nobody expected the Spanish Inquisition! And nobody expected a pandemic in 2020! Oh boy, what a year… How good that 2020 has already passed! It was an extraordinary year, unlike any other in many decades. Unfortunately, 2020 was a disastrous time for many people all over the world who suffered from COVID-19 or whose relatives and friends died because of the coronavirus or the collapse of the healthcare system… Our thoughts are with them. Many others lost their jobs or income, and all of us suffered from loneliness and limited freedom during the Great Lockdown. Indeed, it’s good that 2020 is over – and we hope that 2021 will be much better!

    And what did 2020 mean for gold? Well, it turned out that last year was gracious to the yellow metal. As the chart below shows, gold entered 2020 with a price of $1,515 per ounce, and finished the year at $1,888 (London P.M. Fix as of December 30). It means that the shiny metal rose over 24 percent – that’s not bad considering other assets were hit really hard during the economic crisis!

    Actually, 2020 was definitely better for gold prices than 2019, when the yellow metal gained “only” over 18 percent. As I didn’t predict the global pandemic (who did?), I didn’t forecast such strong gains in my base scenario. However, given the inversion of the yield curve in 2019, I expected a kind of economic downturn that would positively impact gold prices. One year ago, in a January 2020 edition of the Gold Market Overview, I wrote:

    unless anything ugly happens, the macroeconomic environment could be less supportive for gold than in 2019. However, bad things do happen, and, according to Murphy’s law, anything that can go wrong will go wrong. Hence, the gold fundamentals may turn out to be more positive for gold over the year. After all, the yield curve has inverted last year and we are already observing some recessionary trends, especially in the manufacturing sector and among the small-sized companies (…) given the amount of black swans flying just above the market surface, gold might provide us with some bullish surprises as well.

    And indeed, the black swan (or perhaps a white or gray swan) landed in 2020, pleasing the gold bulls. However, despite gold’s impressive performance, some people complain that gold didn’t rally more during the coronavirus turmoil. I completely understand this disappointment – after all, the world suffered its deepest economic downturn since the Great Depression, larger even than the Great Recession, and gold gained only 24.6 percent?

    However, the crisis was deep but very short, as we quickly learnt how to live with the virus, while our brilliant scientists swiftly developed vaccines. Moreover, this time banks were resilient and there was no financial crisis. Another factor is that gold actually rallied more than 36 percent until its peak in August (or more than 40 percent counting from the bottom), but it later corrected somewhat.

    Indeed, we can distinguish a few phases in the gold market in 2020:

    • A pre-pandemic bullish phase caused by easy monetary policy and worries about the coronavirus, that lasted until mid-February, with the price of gold increasing from $1,515 to $1,604 (5.9 percent) on February 19, just before the stock market crash.
    • The bullish period (with a short bearish correction) more closely related to the unfolding pandemic, the stock market crash and central banks’ panic and bold responses. It started on February 20 and ended on March 6, when the price of gold reached $1,684 (gaining 5 percent).
    • The bearish phase caused by investors’ panic selloff of all assets in order to raise cash. It lasted until March 19, when the price of gold reached its 2020 bottom of $1,474 (a decline of 12.5 percent).
    • A super bullish phase that lasted until August 6, when the price of gold reached its all-time peak of $2,067, soaring 40.2 percent in just four and half months. This period can be split into: the bullish phase, caused by the coronavirus shock, that lasted until mid-April; the consolidation period, that came when the financial markets calmed down as the initial doomsday scenarios didn’t materialize, and lasted from mid-April to mid-June; and another bullish phase, caused by disastrous economic data for the first half of 2020, and massive stimulus programs delivered by the central banks and governments.
    • The bearish period, during which the yellow metal declined to $1,763 on the last day of November, or 14.7 percent, due to positive vaccine-related news and reduced geopolitical uncertainty after the U.S. presidential elections.
    • The bullish remainder of the year, during which gold rose to $1,888, or 7 percent, caused by the dark COVID-19 winter, poor economic data, strengthened prospects of another government financial stimulus, and related worries about the rising U.S. debt.

    So, it’s pretty obvious that the course of the pandemic was one of the most important tailwinds for the gold prices in 2020. Thus, the correction caused by the vaccine breakthroughs is not surprising, given the scale of the previous rally. However, please note that gold reacted not to the pandemic itself, but rather to the investors, governments, and central banks’ reaction to it. The yellow metal gained the most when investors were fearful, and when the Fed and Treasury injected liquidity into the markets.

    This all bodes well for gold in 2021. After all, the U.S. central bank won’t cease conducting its very easy monetary policy, while a Biden-Yellen duo will continue the dovish fiscal policy inherited from the Trump administration. Such a policy mix should support gold prices. Of course, the scale of accommodation would be lower than in 2020, so gold’s performance in 2021 could be worse than last year. But unless we see a normalization in the monetary policy and an increase in the real interest rates, the bull market in gold shouldn’t end.

    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 January 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 Biden Trigger Inflation for Gold?

    December 18, 2020, 9:50 AM

    President-elect Joe Biden is expected to increase further government spending. For this and also other reasons, there is a risk that inflation under Biden’s presidency could be higher than under Trump’s. That would be great news for gold.

    Let’s face it, Biden won’t have an easy presidency. And I’m not referring to the fact that he will be sworn in as the oldest president in U.S. history or that he will have to deal with the coronavirus pandemic and the process of vaccine distribution across the country. I’m referring to Biden inheriting an economy with slow growth and too much public debt. Given the debt burden, it should be clear that under Biden’s presidency, real interest rates will remain at ultra-low levels. This is how a debt trap works – the more the debt grows, the less the economy (Treasury) can afford higher interest rates.

    Moreover, Biden will have to face the risk of inflation. Actually, some analysts say that the new POTUS could contribute to the rise of prices. Is it true? Will we finally see an acceleration in the inflation rate?

    So far, consumer inflation has been subdued. As the chart below shows, the CPI overall annual rate has declined from 2.3 percent before the epidemic to 1.2 percent in October.

    For some people, this is all really surprising given all the money pumped by the Fed into the economy. However, the disinflation is perfectly in line with our predictions from the May edition of the Gold Market Overview: “In the short run, we expect disinflation, but we think that the risk of inflation later in the future is higher than a decade ago.”

    Indeed, in the short-run, the negative demand shock outweighed other factors, and people simply increased their demand for money because of the enormous uncertainty and limited opportunities to spend money in the offline economy.

    But didn’t the Fed significantly increase the money supply? It did, but the central banks create only a monetary base, while the majority (more than 90 percent) of the broad money supply is created by the commercial banks. So, for inflationary trends, what really matters is not the Fed’s balance sheet, but rather the commercial banks’ credit expansion, since whenever the banks grant loans, they also create deposits, i.e., money supply.

    Hey, wait a moment, but didn’t the pace of expansion of the banks’ credit and broad money supply also rise? They did! Just look at the chart below. And this is the reason why I believe that the risk of inflation in the aftermath of the coronavirus crisis is higher than after the Great Recession, when banks were strongly hit and didn’t want to expand credit.

    Now the situation is different. However, banks expanded loans not to the consumers but to the entrepreneurs, probably because they needed credit to stay afloat during the Great Lockdown. So, the acceleration in the bank credit could be temporary – indeed, the pace of its expansion has been slowing down recently. But when the pandemic is over, consumers may again tap credit cards and real estate loans.

    Indeed, this is an important upward risk for inflation. Some economists point out here the pent-up demand, i.e., the strong increase in demand for a service or product, usually following a period of subdued spending. The idea is that consumers tend to hold off their demand during a recession, only to unleash it during recovery. It makes sense; during a crisis, the uncertainty rises, so people try to cut expenses and accumulate cash. When confidence returns to the marketplace, people spend money more freely.

    The same could happen during the current pandemic – not only did uncertainty rise, but people also had to practice social distancing and obey sanitary restrictions, which forced them to reduce their expenditures. Hence, when the pandemic is over, the demand for cash may fall, while spending could increase, thereby accelerating inflation. Of course, some demand will simply stay unrealized forever (it would be impossible to make up for all these missed opportunities to drink beers with friends), but when the storm is over and vaccines boost people’s confidence, they will spend a substantial part of their extra savings accumulated during the pandemic.

    Just take a look the chart below – as you can see, the U.S. personal savings rate has increased from about 8 percent before the epidemic to almost 34 percent in April. Now it is staying above 14 percent, so there is still potential to increase consumer spending in the future.

    In other words, people and businesses have not yet used all the stimulus they got from the Fed or the government. Because of this uncertainty, they spent as little as they could, and saved as much they could. Why this is so important? Because when people decide to spend their mountain of money, inflation could accelerate, boosting the demand for gold as an inflation hedge.

    Hence, when the pandemic storm is over, the demand for money should decrease, or the velocity of money should increase. Actually, this is what we have observed in the third quarter of this year – the velocity of M2 money supply has rebounded somewhat, as the chart below shows. So, although the second wave of COVID-19 infections would hamper this process, it’s possible that in 2021 we will see a rise in inflation. Higher inflation also means lower real interest rates, which is another piece of good news for the yellow metal.

    Last but not least, Biden is a supporter of major economic relief, including a second round of stimulus checks, so consumers’ spending power should increase further next year, thus contributing to higher consumer prices. So, although it’s not determined, there is a risk that inflation under Biden’s presidency could be higher than under Trump’s presidency. It would be great news for gold, especially that the Fed’s new regime means that it will not strongly react to rising inflation.

    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 December 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.

  • Is the Vaccine a Game-Changer for Gold?

    December 11, 2020, 9:04 AM

    The vaccines are coming – we’re saved! Although the arriving vaccines are great for humanity, they are bad for the price of gold.

    In November, Pfizer and BioNTech announced that their mRNA-based vaccine candidate, BNT162b2, had demonstrated evidence of an efficacy rate above 90% against COVID-19, in the first interim efficacy analysis. As Dr. Albert Bourla, Pfizer Chairman and CEO, said:

    Today is a great day for science and humanity. The first set of results from our Phase 3 COVID-19 vaccine trial provides the initial evidence of our vaccine’s ability to prevent COVID-19.

    Indeed, the announcement is great news! After all, the vaccine is the ultimate weapon against the virus. There’s no doubt that we will get the vaccine one day. Thank God for scientists – they are really clever people who work hard to develop a safe vaccine! Why can’t we have more of them instead of so many economists? As well, the pandemic triggered unprecedented global cooperation to develop a vaccine as quickly as possible. The funds are enormous, while the bureaucrats eventually decided to behave like decent human beings for once and eased their stance in order to speed up the whole process. Great!

    But… there is always a “but”. You see, there are some problems related to Pfizer’s vaccine. First, all we know comes from the press release, but the company didn’t provide any data for a review. Second, the efficacy rate announced by the company pertains only to the seven days after the second dose is taken – we still don’t know how effective the vaccine is in the longer term, and how long immunity lasts. Third, we still don’t know the efficacy of the vaccine among the elderly and people with underlying conditions – or, the most affected people by COVID-19. Fourth, the vaccine is based on mRNA technology, and such a vaccine was never approved for human use. There is always a first time, but new technologies always give birth to some concerns, which could ultimately reduce the public’s preference to get vaccinated.

    Another problem is that this vaccine requires two doses that are taken 21 days apart. It delays the moment of immunization and again reduces the motivation to take the vaccine – yes, some people are so lazy, and/or they don’t like injections so much (for whatever reason; we’re not debating whether it’s justified or not) that they can refuse to be vaccinated.

    Moreover, Pfizer’s vaccine must be stored at a temperature of about -70°C (-94°F), which is quite low indeed, and can be quite chilly in shorts (unless you are Wim Hof). The problem is transportation and distribution – you see, many hospitals - to say nothing of rural physicians and pharmacies, and healthcare systems in developing countries - do not have adequate freezers to store the vaccine. Last but not least, even if scientists develop the best possible vaccine, it remains useless unless people accept to take it – and this is far from being certain, given the pandemic denial movement and fear of vaccines.

    Sure, one could say that all these points are not very problematic. After all, Pfizer is not the only company working on the vaccine. There are actually more than 150 coronavirus vaccines in development across the world. For example, Moderna’s vaccine can be stored at a much higher temperature – a more comfortable -20°C (-4°F), So even if Pfizer’s vaccine turns out to not be the best, other, even better vaccines will arrive on the market – and a lack of any vaccine can transform into a crisis of abundance.

    That’s true, but the sad truth is that it’s unlikely that any vaccine will be widely available until mid-2021. Pfizer, for example, announced that it hoped to produce 50 million doses by the end of 2020. As the vaccine needs two doses, only 25 million people could be vaccinated this year. So don’t count on being among this group – countries will prioritize healthcare workers, social workers and uniformed services first, and the elderly next. It means that we will not return to a state of normalcy very soon, and most of us will still need to wear masks, practice social distancing and… wash hands!

    In the meantime, the U.S. is about to enter Covid hell, as Michael Osterholm, one of Biden’s advisers on the epidemic, said. Indeed, the country is nearing 11 million reported COVID-19 cases, and the coronavirus has already killed more than 240,000 Americans. But the worst can still lie ahead for the U.S. As one can see in the chart below, the epidemiological curve is clearly exponential and the daily number of new cases has touched 200,000! Yup, you read it correctly, about two hundred thousand people are infected each day. You don’t have to be a mathematician to figure out that at such a rate of infections, the healthcare system will collapse soon.

    What does it all imply for the gold market? Well, although the arriving vaccines are great for humanity, they are bad for the price of the yellow metal. The pandemic greatly supported gold prices. So, the expected end of the epidemic in the U.S. should be negative for the shiny metal.

    However, there are two important caveats to this statement. First, there is still a long way to go before widespread vaccination and a true end to the pandemic. In the interim, we still need to face the COVID-19 challenge, so gold shouldn’t suddenly fall out of favor.

    Second, gold reacted not only to the pandemic itself, but also – or even more – to the world response of governments and central banks to the health and economic crisis. The easy monetary policy and accommodative fiscal policy will not disappear only because of the vaccine’s arrival. Actually, the harsh winter or “Covid hell” that awaits America will force the Fed and Treasury to continue or even to expand their stimuli, which is good news for gold prices from the fundamental perspective.

    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 December 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.

  • What Does Biden Imply for Gold?

    December 4, 2020, 6:30 AM

    America has elected a new President. It was a close race, but Joe Biden eventually won and he will be inaugurated and take office in the White House on January 20. The price of gold rose initially in the aftermath of the elections, only to plunge on the news regarding Pfizer’s vaccine breakthrough, as the chart below shows. This is what we know.

    But what’s next for the price of gold? What does a Biden presidency mean for the yellow metal? To answer these vital questions, we will analyze the agenda of the President-elect. On the official Biden-Harris Presidential Transition website, we found that the new administration has four priorities: COVID-19, economic recovery, racial equity, and climate change.

    The first issue obviously concerns the pandemic. While Trump remained relatively indecisive as to whether to fight aggressively with the coronavirus or to downplay the threat – which I believe cost him the votes of the elderly and ultimately a second term – Biden seems to be determined to beat the epidemic. He has acknowledged the challenge and promised to listen to science and health professionals, although it remains to be seen whether he will actually do so. Regardless, Biden has a seven-point plan to combat the virus, of which the two most important points are: 1) to ensure all Americans have access to regular, reliable, and free testing; 2) to implement mask mandates nationwide by working with governors and mayors and by asking the American people to do what they do best: step up in a time of crisis.

    Boosting testing rates is a great idea. Quick and widespread testing, combined with contact tracing, is believed by many epidemiologists to be the best idea in combatting the virus. The mask mandates, although controversial from the libertarian point of view, could also importantly reduce transmission of COVID-19. Also important is what the plan does not mention. By this I mean the lack of any references to a lockdown. Therefore, Biden’s determination to beat the virus without resorting to a lockdown, is rather negative for gold prices.

    The second priority is economic recovery. The most important points of Biden’s agenda concern building more modern infrastructure, which implies higher government spending. Importantly, Biden plans to partially fund these expenditures by reversing some of Trump’s tax cuts for corporations. Moreover, Biden plans to reform the labor market. He proposes more than doubling the minimum wage, raising it from $7.25 to $15 an hour. He also wants to make it easier for workers to organize unions, and to implement universal paid sick days and 12 weeks of paid family and medical leave. Widening access to affordable health care is also a stated goal.

    From the economic point of view, such bold reforms in the labor market that would increase labor costs are not the best idea during an economic recovery, when many small and medium entrepreneurs are still struggling to survive in the market. Reversal of tax cuts would also not be welcomed by Wall Street and corporate America. So, Biden’s economic agenda could benefit gold somewhat, especially if higher infrastructure spending is financed by large fiscal deficits and if it further increases public debt.

    However, a lot depends on the narrative adopted by market participants. If investors focus not on the rising public debt, but on the revival of infrastructure and economic recovery, then gold may struggle. However, I believe that in the current macroeconomic environment of low real interest rates, rising public debt and risk of higher inflation in the future, gold should perform satisfactorily.

    The third priority of racial equity is described in a somewhat vague manner, which takes the form of postulates rather than specific points. The agenda definitely includes police reform legislation to reduce racial disparities within the criminal justice system. The push for greater racial equity shouldn’t impact gold prices significantly.

    And finally, Biden also wants to deal with climate change by investing in green infrastructure, and hoping to achieve a carbon pollution-free power sector by 2035 and net-zero emissions, economy-wide, by no later than 2050. This plan is bold and if the new administration focuses too much on the environment, it could easily burden the private sector with regulations and hamper economic growth. So, this can be positive for gold prices, especially when combined with fresh fiscal stimulus, higher government spending, and ballooning federal debt.

    To sum up, Biden’s presidency could be somewhat positive for gold prices due to higher government spending and anti-corporate points like the reversal of Trump’s tax cuts and increasing labor costs (raising the minimum wage, etc.). However, Biden’s impact on the gold market is likely to be smaller than previously thought by many analysts. This is because Republicans may remain in control of the Senate (if they win at least one of two seats in Georgia’s runoff in January), with power to block the most radical ideas of the new administration.

    Moreover, the Republicans performed above expectations in the elections, gaining seats in the House and almost retaining the White House. It clearly shows that voters do not support the most progressive elements of the Democrats’ agenda. Biden is, therefore, likely to govern more as a centrist rather than a radical leftist, which is positive for the economy, but bad news for gold prices. Nevertheless, investors shouldn’t overestimate the power of the President over the economy. It means that gold’s bull market can continue under Biden’s presidency, unless the macroeconomic outlook changes abruptly and the real interest rates start to rise.

    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 December 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.

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