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Gold Market Overview

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

  • Does Gold Know That a Recession Is Coming?

    August 12, 2022, 11:28 AM

    Recession has already occurred or is on its way.. Somebody should tell gold about it!

    Is a recession really coming? We already know that the yield curve inverted last month for the second time this year, but what are other indicators of looming economic troubles? Well, let’s start with GDP. According to the initial measure of the Bureau of Economic Analysis, real GDP dropped 0.9% in the second quarter, following the 1.6% decline in the first quarter (annualized quarterly rates). On a quarterly basis, real GDP decreased by 0.4 and 0.2 percent, respectively. Hence, the American economy recorded two quarters of negative growth, which implies a technical recession.

    Second, the New York Fed’s DSGE Model became pessimistic in June, as it predicted modestly negative GDP growth in both 2022 (-0.6%) and 2023 (-0.5%). According to the model, the probability of a soft landing is only 10%, while the probability of hard landing—defined to include at least one quarter in the next ten in which four-quarter GDP growth dips below -1 percent—are about 80 percent. When the Fed’s own models predicts recession, you can be sure that the situation is serious!

    Third, money supply growth has slowed down significantly in recent months. As the chart below shows, the growth rate declined from the peak of 26.9% in February 2021 to 5.9% in June 2022. This is a significant shift, because money supply tends to grow quickly during economic booms and slow before recessions, as banks "slam on the brakes" on money creation.

    That’s not all! The S&P 500 has entered a bear market, while credit spreads have widened significantly. Financing costs for “junk” companies have almost doubled this year. Residential investment plunged 14% in Q2 2022, the largest decline in 12 years (excluding the pandemic era), and the housing market in general is suffering right now. The auto bubble is showing signs of bursting, and banks are already leasing more land to handle the expected surge in repossessed used cars. Business confidence and consumer sentiment are very low. Commodity prices (like copper) have plunged recently, and rising inventories at retailers could also foreshadow upcoming economic weakness.

    Of course, not all the data points to a recession. In particular, the unemployment rate is still very low and the labor market remains tight. The problem is that the unemployment rate is a lagging indicator, as people start to lose jobs only when the economy has already begun declining. However, as the chart below shows, the unemployment rate hasn’t changed since March 2022, when it reached 3.6%. It suggests that it has found its bottom and may be ready to go up after a while. Moreover, jobless claims have risen from 166,000 on March 19 to 244,000 on July 9, which may herald upcoming problems. If we could have a jobless recovery from the 2001 recession, why couldn’t we have a jobful recession, at least in theory?

    The second popular counterargument is that consumer spending remains healthy. This is true, but it shows some signs of slowing as inflation hits Americans’ budgets. In particular, real spending, adjusted for inflation, shows a less optimistic picture, as the chart below presents. Generally speaking, pointing at high spending during inflation doesn’t make sense, as this is exactly why we have inflation – newly created money by the Fed and commercial banks goes to people who are spending it. Moreover, during high inflation, spending money on goods and services is a reasonable course of action because it’s better to have some tangible assets than money, which is losing purchasing power each month.

    More generally, inflation has become so persistent that only a serious monetary policy tightening could bring it back to the Fed’s target of 2%. Actually, inflation is so high that it could trigger a recession on its own, as it seriously disrupts economic life. The problem here is that there is so much private and public debt that the aggressive interest rate hikes – needed to combat inflation – could burst asset bubbles and trigger a debt crisis.

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    What does it all mean for the gold market? Well, for me, the case is clear. We are either already in a recession or heading toward one. Given that gold is a safe-haven asset, a recession should be positive for its prices. As the chart below shows, gold usually rallies during economic downturns – and this has been the case in the past three recessions.

    However, this relationship is not set in stone. The double-dip recession of the early 1980s was bearish for gold. The yellow metal soared during stagflation, but when Volcker hiked interest rates to combat inflation, it plunged, despite the fact that the Fed’s tightening cycle triggered recession. Hence, if the inflation rate goes down, real interest rates could increase further, putting downward pressure on gold. However, a recession is likely to be accompanied by a dovish Fed and declining bond yields, which should support 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, and the gold market, we invite you to read the August Gold Market Overview report. Please note that in addition to the above-mentioned free fundamental gold reports, and we provide premium daily Gold & Silver Trading Alerts with clear buy and sell signals. We provide these premium analyses also on a weekly basis in the form of Gold Investment Updates. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: 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 Yield Curve Inverts. Now It’s Time for Gold to Turn Back

    August 5, 2022, 1:22 PM

    The yield curve has spoken: a recession is coming. Everything indicates that it will make gold shine.

    It Happened Again

    Have you ever wondered what the yield curve’s favorite song is? Neither have I, but I bet that in July it was Britney Spears’ hit, Oops, I Did It Again! Indeed, the yield curve inverted again last month, for the second time in 2022. It means that long-term rates fell below those on shorter-dated bonds.

    As the chart below shows, the spread between 10-year and 2-year US Treasuries fell below zero for the first time this year at the beginning of April. However, it was a very short inversion, which lasted only two days, but on July 6, the yield curve inverted again – and this time it was more lasting.

    This is a very important development, as it strengthens the recessionary signal sent by the curve in April. The previous reversal was very brief and shallow – and thus not very reliable. However, the second inversion within just four months implies that dark clouds are indeed gathering over the US economy.

    Why? There are two explanations for the yield curve’s inversion. According to the first one, more mainstream, inversion means that investors expect higher rates now and lower rates in the future, as they believe that the Fed’s tightening cycle will lead to a recession. The second interpretation is offered by the Austrian school of economics. It says that because of input price inflation and the tightening of the Fed’s monetary policy, entrepreneurs and investors are simply scrambling for funds, as they are in a liquidity shortage, which bids short-term interest rates up. Which one is true? Well, as the chart below shows, the yield curve has clearly inverted because of the rise in the 2-year Treasury yield, which fits nicely with the Austrian boom and bust cycle theory.

    However, why should we worry about the yield curve’s inversion? Well, as the chart below shows, the inversion of the yield curve has been historically a very powerful recessionary signal. As one can see, it preceded all recessions since 1976. For example, the yield curve inverted in February 2000, in parallel with the burst of the dot-com bubble and about one year before the official beginning of a recession. The spread also turned negative in mid-2006, several months before the Great Recession, and in August 2019, just around the repo crisis, which would lead to another recession even if the coronavirus crisis didn’t occur. There was a false signal sent by the yield curve, but only one, when the curve inverted in mid-1998.

    Should we believe the yield curve this time? Well, it’s possible that we’ll avoid a recession this time. After all, despite the slowdown in GDP growth, the labor market remains tight and the unemployment rate stays at a very low level. The more important spread between 10-year and 3-month US Treasuries hasn’t yet turned negative, as the chart below shows. However, it has flattened significantly since May, plunging to a level close to zero, and it may invert as well after the next hike in the federal funds rate.

    Another issue is that since COVID-19, we have lived in exceptional times, so traditional indicators might not work properly now. However, this is something the pundits say each time the yield curve inverts: this time it’ll be different. Yeah, for sure! I’ve heard many justifications why we shouldn’t worry about the yield curve’s inversion in 2019. Each time it turned out that the yield curve was right and the pundits – wrong. In 2019, there was a repo crisis and a standard recession was on the way – the only reason it didn’t occur was the introduction of the Great Lockdown and the emergence of the coronavirus recession.

    What does it all mean for the gold market? Well, in the immediate future, not much. In fact, the increase in the short- to medium-term bond yields could be negative for the yellow metal. However, in the more distant future, the inversion of the yield curve bodes well for gold. After all, it means that the recession is coming, and gold tends to shine during economic crises. Also, during an economic downturn, the Fed is likely to reverse its hawkish stance. When the Fed stops raising interest rates and starts to cut them, gold should rally again.

    The analogy might be the 2018-2020 period. The Fed hiked the federal funds rate for the last time during its previous tightening cycle in December 2018. In July 2019, it started to cut its policy rates. As the chart above shows, the Fed’s dovish U-turn made gold soar. The same may happen this time. However, gold bulls should still be prepared for some pain – the Fed hasn’t said the last hawkish word.

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

    Arkadiusz Sieron, PhD
    Sunshine Profits: 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 Will Come Out Stronger from the Economic Hurricane

    July 22, 2022, 10:37 AM

    Recession calls are getting louder. If history is any guide, the bust is coming. Good news for gold!

    An economic hurricane is coming. Brace yourselves! This is at least what Jamie Dimon suggested last month. To be precise, he said: “Right now, it's kind of sunny. Things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there down the road, coming our way. We just don’t know if it's a minor one or Superstorm Sandy.” When JP Morgan Chase’s CEO is painting such a gloomy picture, you know that something serious is going to happen!

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    Indeed, both on Wall Street and Main Street, calls for a recession are becoming more common and louder. According to Markit, credit default swaps have nearly doubled so far in 2022, surpassing the pre-pandemic levels. The higher their prices, the greater the chance of default in the eyes of investors. The high yield bond market is also showing that worries about the state of the economy are rising. As the chart below shows, the spread between so-called junk bonds and Treasuries surged from about 300 to more than 500 basis points in 2022.

    It means that the risk premium – a premium that investors require to hold risky bonds – has risen considerably this year, to the heights of the coronavirus crisis. The implication is clear: market sentiment is deteriorating and confidence in the economy’s strength is declining. The widening credit spreads are usually a good harbinger for the gold price.

    Not only investors have become more worried recently. As the chart below shows, US consumer sentiment as measured by the University of Michigan dived below 60, to a level not seen since the Great Recession and, earlier, the recession of 1980.

    Are these concerns justified? I’m afraid so! The Atlanta Federal Reserve’s GDPNow tracker is now pointing to an annualized real GDP growth of just 0% for the second quarter. Atlanta, we have a problem!

    To understand what is happening right now, it would be useful to recall the Austrian business cycle theory. According to the Austrian school of economics, there is a phase of boom triggered by the increase in the money supply in the form of credit expansion and the policy of low interest rates that stimulate borrowing and investment, and then the inevitable bust. The bust is imminent as a credit-based boom results in aan imbalance between saving and investment and widespread malinvestments. So, when the credit expansion is slowing down and interest rates are rising, it turns out that many investment projects were not justified by the fundamentals and could be started only because of artificially lowered interest rates and excessive lending. When the bubble bursts, a recession unfolds.

    Now, let’s apply this theory to the present situation. In a response to the coronavirus pandemic, governments all over the world panicked and introduced costly lockdowns. To compensate for the losses, the Fed slashed the federal funds rate to almost zero and boosted the monetary base by 40% in just two months. But what distinguished this episode from the previous monetary injections is that the Fed introduced many liquidity programs for Main Street. As a consequence, in the two years after the outbreak of the pandemic, the broad money supply M2 rose by more than 40%, while bank credit increased by about 20% (see the chart below).

    As the bulk of this newly created money went to entrepreneurs, they started new investments. However, because input supply had not increased, producer prices soared (as shown in the chart below, producer prices have risen 40% since the pandemic), forcing entrepreneurs to borrow money in the market, driving up bond yields and causing a yield curve inversion. At some point, when interest rates increase too much, entrepreneurs will have to abandon or seriously restructure their projects, triggering a full-scale recession. We are already witnessing some tech companies firing workers in an attempt to reduce costs.

    What does it all mean for the gold market? Well, the bust is coming, or, actually – as Kristoffer Hansen points out – the crisis is already upon us. This might be surprising as, typically, business cycles are much longer, but the 2020 monetary impulse was an unusually large but one-time event. This is good news for the yellow metal, which shines during financial crises. Indeed, in the recessionary year of 2008, gold gained 4%, although it initially lost due to fire-sales, and it rallied even more impressively in 2009 and subsequent years. So far, I would say that we are still in 2007, when the stock market has already entered the territory but the real economy hasn’t fallen into recession yet. However, this is likely to change in the upcoming months. If history is any guide, gold will ultimately come out stronger from the crisis.

    Summary

    Let’s sum up the current edition of the Gold Market Overview. As the chart below shows, June was negative for the yellow metal. The price of gold dropped 1.2% from $1,839 on May 31 to $1,817 on June 30. So, it was a better month than May, in which gold prices fell 3.8%. From its March peak, the yellow metal is down about 11%, but it’s slightly changed year-to-date.

    Gold’s performance was actually better than the chart suggests. This is because the yellow metal held its ground amid relatively steep hikes in the federal funds rate. The Fed hiked interest rates by 75 basis points in June, following a 50-basis point raise in May and a 25-basis point liftoff in March. The hawkish FOMC meeting contributed to the plunge in the stock market and cryptocurrencies, but gold remained generally resilient, clearly outperforming other assets. However, in early July, the price of gold sank deeply below $1,800, so the period of resilience could end and the downward wave could start.

    Inflation is still very high and it persists even when GDP growth is slowing down. This means that we are approaching stagflation, which should cause gold to rally. The US economy is already decelerating, but the aggressive Fed’s tightening cycle (because it was so terribly delayed) could trigger a recession. The S&P 500 Index has already entered bear market territory, and credit spreads are widening, suggesting a drop in economic confidence. There are also other indications suggesting that the next economic crisis is coming. All this suggests that gold could shine, at least after the currently challenging time.

    So far, surging real interest rates are creating downward pressure on gold. However, steep hikes in the federal funds rate imply that we’ll see the peak sooner. What’s important is that Powell is not Volcker and won’t swallow so much economic pain to combat inflation. Even if he was ready to do so, the current, highly indebted economy is not, and when the tightening cycle is over and investors start to expect interest rate cuts rather than further hikes, gold should rally again.

    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, and the gold market, we invite you to read the July 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 the Fed Takes the Punch Bowl Away, Stick to Gold

    July 15, 2022, 10:12 AM

    The massive monetary binge is over. The Fed is taking the punch bowl away. The hangover is coming. The best cure is – except for the broth – gold.

    No Longer Doves

    75 basis points! This is how much the FOMC raised interest rates in June. As the chart below shows, it was the biggest hike in the federal funds rate since the 1990s. Due to this huge move, the target range for the federal funds rate returned to the pre-pandemic level of 1.50-1.75%. Given how dovish and gradual the US central bank normally is, we may conclude that the inflation threat is really serious. The Fed has been so far behind the inflation curve that it must raise rates at the fastest pace in more than a quarter of a century!

    Last month, the US central bank also started reducing the size of its enormous balance sheet. Until September, the Fed will be cutting $45 billion a month from its massive holdings, and it will increase to $95 billion, almost twice as much as it did in the previous episode of quantitative tightening. As the chart below shows, the value of the Fed’s assets has already peaked, reaching $8.95 trillion in mid-May 2022.

    What does it all mean for the US economy? Well, let’s start with the observation that although the Fed is tightening its monetary policy, its stance remains accommodative. According to the Taylor rule, the federal funds rate shouldn’t be just between 1.50% and 1.75%, but at least above 5% (see the chart below taken from the Atlanta Fed)! At such a level, the Fed will be “neutral”, but to beat inflation it should be restrictive, not merely neutral!

    It means that the US central bank remains behind the inflation curve and would have to raise interest rates much further to combat high inflation. However, it raises a very important question: could the Fed raise rates so decisively without triggering the next economic crisis? This is, of course, a rhetorical question.

    As a reminder, the previous Fed’s tightening cycle of 2017-2019 led to the repo crisis, forcing the US central bank to reverse its stance and cut interest rates. Given how fragile the financial system is and how much indebted the American economy is, it’s almost certain that the current monetary policy tightening will lead to a sovereign-debt crisis or another kind of financial crisis.

    Right now, the commercial banks seem to be in healthy condition and with ample reserves, so the risk of a liquidity crisis in the very near future is low. However, as the tightening continues, the debt-servicing costs and share of nonperforming loans will increase, worsening the financial situation. So far, Powell is flexing his muscles, but this is only because the labor market remains strong, but when faced with the choice between fighting inflation and stimulating a crumbling economy, I doubt whether he could withstand the pressure from both Wall Street and the government, which are heavily indebted and addicted to easy money.

    Implications for Gold

    What does it all imply for the gold market? Well, theoretically, monetary policy tightening should be negative for gold prices, as higher real interest rates usually lead to lower gold prices. However, gold has been generally very resilient during the current tightening cycle. It’s true that it didn’t rally despite the outburst of inflation, but its gave a stellar performance (even when we take July plunge in the account) in the face of rising rates and in comparison to plunging equities or cryptocurrencies, as the charts below show. By the way, it seems that the debate about whether gold or Bitcoin is a better store of value has been settled.

    Powell still believes in a soft landing, but he may be the only one. You see, after a gigantic binge, there is always a hangover. When the host of the great party is taking away the punch bowl, drunken guests loudly express their dissatisfaction, which can even translate into brawling. Similarly, after a massive increase in the money supply, there is high inflation that you cannot just wait out, lying in bed and eating broth. You have to hike interest rates, but then borrowing costs are increasing, which hits many excessively indebted companies and investors, and the economic boom translates into a bust.

    Busts are awful, but not for gold. The yellow metal rallied during both the Great Recession and the coronavirus crisis (and also during the repo crisis), and I believe that this time won’t be different. We just have to wait until deteriorating economic conditions force the Fed to deviate from its planned course. Initially, when the next crisis hits, there might be a panic sell-off in the precious metals market in order to raise liquidity, but after this short period, gold should rally, shining brightly as a truly safe haven.

    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, and the gold market, we invite you to read the July 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 Bears Took Control of the Market, but Refrained from Gold

    July 8, 2022, 10:45 AM

    The bears awoke from their winter sleep and took control of Wall Street. However, they haven’t conquered the gold market yet!

    It’s official: there is a bear market in equities! As the chart below shows, last month, the S&P 500 Index plunged more than 20% from its historic peak of 4797 points in early January 2022. A decline of greater than 20% is considered to mark a bear market as opposed to a normal correction within the bull market. The Dow Jones hasn’t yet crossed that threshold, but the S&P better reflects the condition of the US stock market, so we can firmly state that bears took control of Wall Street for the first time since the pandemic crash.

    How long will the bear market last? According to Reuters, after World War II, on average, stocks declined slightly over a year from the peak to the bottom. So, the current bear market could continue for a few months. Similarly, on average, the S&P 500 index fell by 32.7% during modern bear markets. Hence, there is room for further declines in the stock market.

    What does the bear market in equities mean for the US economy? Well, the bear market in stocks doesn’t have to be something disturbing for the whole economy. As the old joke goes, “the stock market has predicted nine of the past five recessions.” Indeed, 25 bear markets have happened since 1928, of which only fourteen have also seen recessions.

    However, in modern times, the relationship between the stock market and overall economic activity has strengthened. There have been eleven bear markets since 1956, of which eight have been accompanied by recessions. Since 1968, all bear markets but one (the infamous 1987 crash) have coincided with overall economic crises. Finally, all four recent cases of bear markets (1990, 2000-2003, 2007-2009, and 2020) were accompanied by recessions (see the chart below).

    Hence, we should take the bearish stock market seriously. Although a bear market doesn’t necessarily cause a recession, it sometimes portends one. For example, the dot-com bubble in the stock market reached its peak and burst in August 2000, seven months before the US economy fell into recession. When this occurred in March 2001, the S&P500 just entered a bear market territory. Later, the stock market peaked again in October 2007, just two months before the official beginning of the Great Recession. It entered bearish territory in September 2008, when Lehman Brothers collapsed, triggering the most acute phase of the global financial crisis. Given that we are already five months since the S&P 500’s most recent peak and one month since the index entered a bear market, a recession may be on the horizon (theoretically, we could be already in one, as the NBER declares official beginnings many months after they have already started).

    Of course, each case is unique, and this time may be different. However, there are important reasons to worry. After all, the stock market dived due to the Fed’s tightening cycle, initiated to curb high inflation. Although necessary to tame upward price pressure, it could trigger a recession. The last three economic downturns – and bear markets in equities – were preceded by hikes in the federal funds rate, as the chart below shows.

    What does it all mean for the gold market? Well, bear markets that accompany recessions are generally positive for the yellow metal. However, the relationship is more nuanced than one could intuitively expect. In 2000-2001, gold declined initially in tandem with the stock market and bottomed out in April 2001, one month after the S&P 500 entered a bear market, as the chart below shows.

    Then, it started a multi-year rally that ended in March 2008, in the middle of the Great Recession. Gold remained in a downward trend by November 2008, plunging in tandem with the stock market, although to a lesser extent. Only then did it start its fabulous surge. A similar pattern occurred in 2020: during the pandemic March, gold declined alongside the S&P 500, albeit to a lesser extent, and began to rally shortly after the initial sell-off.

    This suggests that we could be close to the bottom in the gold market. If there is an asset sell-off when investors scramble for cash needed to fulfill their obligations and cover their margin calls, the yellow metal could decline further. However, when this phase of a crisis is over, gold should shine. Rising interest rates could continue to exert a downward pressure on the yellow metal for a while, but when they peak, gold will have a clear field to 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, and the gold market, we invite you to read the July 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.

  • Stagflation With Powell Could Make Gold Happy

    July 1, 2022, 12:37 PM

    The upcoming stagflation might be less severe than in the 1970s. So is the Fed’s reaction, which could mean good news for gold.

    There are many terrifying statements you can hear from another person. One example is: “Honey, we need to talk!” Another is: “I’m from the government and I’m here to help.” However, the scariest English word, especially nowadays, is “stagflation.” Brrr!

    I’ve explained it many times, but let me remind you that stagflation is a combination of economic stagnation and high inflation. This is why it’s a nightmare for central bankers as they should ease monetary policy to stimulate the economy and simultaneously tighten it to curb inflation.

    Although we haven’t fallen into recession yet, the pace of GDP growth has slowed down recently. According to the World Bank’s report Global Economic Prospects from June 2022, “the global economy is in the midst of a sharp growth slowdown” and “growth over the next decade is expected to be considerably weaker than over the past two decades.” The U.S. growth is expected to slow to 2.5 percent in 2022, 1.2 percentage points lower than previously projected and 3.2 percentage points below growth in 2021.

    This is why more and more experts raise concerns about stagflation similar to what happened in the 1970s. So far, employment remains strong, but the misery index, which is the sum of the unemployment rate and inflation rate, is already relatively high (see the chart below) and could continue to rise if economic activity deteriorates further.

    So, it seems that the consensus view is that stagflation is likely, but the key question is how bad it will be, or how similar it will be to the stagflation of the 1970s. As the chart below shows, that period was pretty bad. The inflation rate stayed above 5% for a decade, reaching almost 15% in early 1980. Meanwhile, there was a long and deep recession in 1973-1975 and the subsequent two in the 1980s, triggered by Volcker’s monetary tightening that was necessary to curb high inflation.

    Similarities are quite obvious. First, the economic slowdown came after the previous recession and rebound. Second, supply shocks. Supply disruptions caused by the pandemic and by Russia’s invasion of Ukraine resemble the oil shocks of the 1970s. Third, the burst of inflation comes after prolonged period of easy monetary policy and negative real interest rates. According to the World Bank, “global real interest rates averaged -0.5 percent over both the 1970-1980 and the 2010-2021 periods”. Fourth, consumer inflation expectations are rising significantly, which increases the risk of their de-anchoring, as in the 1970s. As the chart below shows, consumers now expect inflation to run at 5.4% over the next twelve months, according to the University of Michigan survey, the highest level since 1981.

    However, the World Bank also points out important differences. First, the magnitude of commodity price jumps has been smaller than in the 1970s. Oil prices are still below the peaks from those years, especially in real terms, while the economy is much more energy-dependent. Second, the fiscal stance is tighter now. In the 1970s, fiscal policy was very easy, while now it’s expected to tighten, which could help to curb inflation. According to the CBO, the federal budget deficit will shrink to $1.0 trillion in 2022 from $2.8 trillion last year.

    Third, the M2 money stock M2 ballooned after the pandemic by 40% in just two years. So, the increase in the money supply was much more abrupt, although it was rather a one-time outburst than a constant fast pace of money supply growth as it was in the 1970s (see the chart below). Thus, the pattern of inflation could be similar.

    Fourth, contemporary economies are much more flexible with the weaker position of trade unions, and income and price policies (like interest or price controls) are not popular today. It allows a faster response of supply to rising prices and reduces the likelihood of price-wage spirals. The fifth difference mentioned by the World Bank is more credible monetary policy frameworks and better-anchored inflation expectations. Although true, I would be cautious here, as the Fed remains behind the curve and people could quickly lose confidence in the central bank while inflation expectations could easily de-anchor.

    For me, the two crucial differences are the much higher levels of both private and public debt today compared to the 1970s (see the chart below) and less political willingness to combat inflation. Yes, Powell could have a laser focus on addressing inflation right now, but I seriously doubt whether he will stick with significantly raising interest rates, especially when the economy starts to falter.

    So, what are the conclusions and implications for the gold market? Well, stagflation is indeed likely, as I expect a further economic slowdown next year, which will be accompanied by stubbornly elevated inflation, although rather lower than this year, thanks to normalization in the pace of money supply growth and tightening of both monetary and fiscal policies. Hence, the upcoming stagflation could be less severe than in the 1970s.

    The Fed’s response will also be less aggressive. Luckily for the yellow metal, Powell is not Volcker, so he won’t raise the federal funds rate so decisively. Hence, the current Fed’s tightening cycle could continue to exert downward pressure on gold. However, when the Fed chickens out and deviates from its hawkish plan when faced with recessionary winds, gold should rally again.

    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, and the gold market, we invite you to read the July 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.

  • Recession Is Coming. Should You Be Concerned?

    June 24, 2022, 10:27 AM

    It’s certain that the recession will come eventually. The questions are: when, how will it impact the market, and are there any reasons to be afraid?

    Is a recession coming? Yes, it is! Recession is a normal part of a business cycle, so, yes, the current phase of economic boom will eventually turn into recession. That’s for sure.

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    The more tricky question is about timing: is a recession just around the corner, as more and more economists and analysts worry? Well, there are some disturbing economic signals worth looking at. First, in the first quarter of 2022, the real US GDP decreased 0.4% compared to the Q4 of 2021 (see the chart below), or 1.4% at an annualized rate, according to the advance estimates by the Bureau of Economic Analysis. The decline in GDP is always scary, but this time it shouldn’t be, as it resulted mainly from an increase in the trade deficit, i.e., the widening difference between exports and imports.

    What happened is that supply chains improved, so imports of goods surged, causing the GDP to drop, as exports are added to the GDP while imports are subtracted from it. However, this is likely to reverse, as businesses won’t build inventories all the time. Moreover, consumers are switching their spending from goods to services, while China’s new lockdowns will cause fresh distortions in the supply chains, which will also reduce imports. Thus, the recent decline in GDP doesn’t signal a recession.

    Second, the yield curve has inverted. As the chart below shows, the spread between 10-year and 2-year Treasuries turned briefly negative at the turn of March and April. The inversion of the yield curve is probably the strongest recessionary indicator, so it should be taken seriously.

    However, the spread between 10-year and 3-month Treasuries didn’t invert (neither the difference between 10-year yields and the federal fund rate). Actually, this spread became steeper in April, and is well above the negative territory, as the chart below.

    This is very important as this maturity combination is believed to be the most accurate recessionary indicator, better than the use of 10-year and 2-year yields. In 2019, both curves inverted, which provided a much stronger recessionary signal. Hence, I wouldn’t use the recent brief inversion as a justification for strong recessionary calls, at least not yet, and I would wait for other confirming signals.

    Third, there is a big correction in the US stock market. As the chart below shows, the S&P 500 Index plunged 18.7% from its all-time high in January, while Dow Jones sank 15%. Many people define a bear market as a situation when prices fall 20% or more from their recent highs. So, although we haven’t reached the bear market, we are very close to it.

    However, even if there is a technical bear market in stocks, it doesn’t have to imply an imminent recession. As the old joke goes, “the stock market has predicted nine of the past five recessions”. Bear markets are a normal part of the stock market’s functioning, and they don’t have to indicate economy-wide recessions.

    Last but not definitely least, high inflation reduces real wages for most workers, negatively affecting spending and market sentiment. To combat such a high inflation, the Fed would have to hike the interest rates to a level that risks triggering a recession.

    What does it all mean for the precious metals market? Well, gold generally shines during periods of economic crisis, so the upcoming recession would be great news for the yellow metal. But I don’t see it in the data yet, so, we will have to wait a little longer for the next rally in the gold market.

    However, gold bulls shouldn’t feel disappointed. The economic outlook is generally gloomy. Economic growth has slowed down – the IMF cut its forecast for global growth this year to 3.6% from 4.4% expected in January and from 6.1% in 2021 – while inflation is still above 8%. There is a war in Europe, and the Fed is tightening its monetary policy and financial conditions. Such a mixture won’t end well, and – given how high is inflation already – I don’t believe that the Fed will engineer a soft landing.

    Actually, I would say that a recession is almost certain within a few years – what is unsure is its reason. There are two options. The first is that the Fed will bring inflation under control. However, to do this now – when inflation is already high – it would have to raise interest rates and tighten monetary conditions in an aggressive manner that would likely cause a recession. The second scenario is that inflation remains unchecked and would produce sufficient economic distortions to lead to the recession on its own. One way or another, an economic downturn is coming!

    Hence, my bet is that the next year – when the Fed’s tightening cycle will be much more advanced or even already ending, and we will be closer to recession – will be better for gold than 2022.

    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, 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 Save Souls During the Inflationary Apocalypse?

    June 17, 2022, 10:06 AM

    While inflation continues to wreak havoc, gold is reluctant to respond. Will it finally change and the price of the yellow metal rise?

    The Fourth Horseman of the Apocalypse

    The end is nigh! There should be no doubt about it now, as more horsemen of the Apocalypse are coming (see the painting below). The first was Pestilence. Two years ago, the COVID-19 pandemic plunged the world into a Great Lockdown and the deepest recession since the Great Depression. At the end of February 2022, the Russian troops brought War and Death to the Ukraine. Also, say hello to Famine, another horseman. To be clear, I don’t mean ‘hunger’ in the United States or other developed countries (although people in besieged Mariupol are running out of drinking water and food), but rather dearth and dearness. In other words: inflation.

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    It doesn’t look very optimistic, indeed. As you can see in the chart below, the annual CPI rate has accelerated from 0.2% in May 2020 to over 8.0% in March and April 2022. Importantly, the core CPI, which excludes food and energy prices, has also surged recently, rallying from 1.25% two years ago to above 6.0% now.

    That’s a really high increase in the cost of living that hit society, especially the poor. There are already reports that people are skipping meals or taking desperate measures to save on heating costs (e.g., they are making fires in houses or, in the UK, pensioners are riding buses to keep warm and save on heating). As the chart below shows, March’s reading was the largest since December 1981 for the overall CPI and since August 1982 for the core CPI, as the chart below shows. And inflation rates were already retreating then, while today they are still on a rise.. Inflation rates were already retreating then, while today they are still on the rise.

    Are they? Well, inflation numbers in April came in slightly lower than in March, so it’s possible that inflation has already peaked. However, the rate was still higher than the consensus estimate of 8.1%, and it may be just a temporary pullback, similar to the one we saw in the summer of 2021. Inflation was less red-hot because gasoline prices declined 6.1% in April, but they spiked again in May (see the chart below), which will contribute to the upcoming inflationary reading.

    Moreover, as the chart below shows, the shelter index, which is the largest component of the CPI, has been constantly rising (as well as the producer price index), so there is an ongoing upward pressure on prices. Additionally, widespread lockdowns and an economic slowdown in China would hit the global supply chains again, strengthening the inflationary forces. Last but not least, the private savings boosted by the pandemic are still elevated, so consumers have resources they can tap. Hence, high inflation is likely to stay with us for some time.

    For how long? This is a great question that everyone is asking right now. On the one hand, the pace of growth in the money supply has recently slowed down, as the chart below shows, which gives us some hope for normalization in inflation in the future.

    On the other hand, the pace still hasn’t returned to the pre-pandemic levels, so inflation won’t simply disappear. What’s more, there is still a huge overhang in the monetary ‘bathtub’ waiting to come out through the pipeline as inflation. You see, the broad money supply increased by about $6.4 trillion between February 2020 and March 2022, while the real GDP rose by just $2.5 trillion. In other words, the money supply surged far more that what could be absorbed by economic growth, and the rest of the newly created money must be accumulated by higher prices (and increased demand for money, but let’s not complicate things here). Hence, the decline in the inflation rate in April shouldn’t be viewed as the beginning of disinflation. Elevated inflation is likely to remain with us this year, and possibly also in 2023.

    Good News for Gold?

    What does it imply for the gold market? Theoretically, it should be great news, as gold usually shines during periods of high and accelerating inflation. However, “usually” does not mean “always”. As we all know, gold has failed to rise in tandem with the current inflation so far and has been unable to break free from the $2,000 level. As the chart below shows, the yellow metal has remained in a downward trend since March 2022, if not August 2020.

    One of the reasons for gold’s disappointing behavior is that rising inflation was accompanied by expectations of higher interest rates. Given the already hawkish stance of the Fed, prolonged inflation could only increase the Fed’s tightening cycle even more.. This is why the real interest rates have surged recently despite rising inflation, which is clearly not good news for the yellow metal.

    The only hope for gold is that either inflation or the US central bank’s response to it will eventually trigger a recession. Well, it will occur one day, but not yet – with all that money still in the bathtub and generating overflow in the form of price inflation, the economy still seems overheated. This is probably another reason why gold didn’t rally like it did in the 1970s. To be clear, the economic outlook has darkened recently and the risk of stagflation has increased. However, the end is not nigh – unless it is…

    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, 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.

  • Real Interest Rates Turn Positive, but It’s Negative for Gold

    June 6, 2022, 12:15 PM

    The recipe for happiness is to see the bright side of even negative situations. Positive interest rates are rather bad news for gold. Here’s why.

    This is a huge change, perhaps a game-changer! What do I mean? The chart below – which is one of the most important charts about the current US economy and the gold market – tells the whole story.

    Do you see what I see? The US real interest rates – measured here by 10-year inflation-indexed Treasury yields – have finally returned above zero. It means that the real interest rates are no longer negative. This is a big story!

    Why? Because gold performs much better during periods of negative real interest rates than positive ones. This is because gold is a non-interest-bearing asset, so the higher interest rates, the higher the opportunity cost of holding gold, and vice versa. In other words, when real rates are negative, owning the yellow metal is more attractive, but when rates are positive, holding gold becomes less alluring.

    To be sure, the real interest rates remain very low, and at levels close to zero, they don’t have to strongly hit the yellow metal. However, gold is usually strongly correlated to the real interest rates (please see the chart below), so their further rise could be detrimental to gold.

    Indeed, if history is any guide, dark clouds may lie ahead for gold. The previous case of normalization of interest rates in 2012-2013 pushed the yellow metal into the bear market. The surge in the real interest rates from -0.87% to 0.92% was accompanied by a plunge in gold prices by 18.2%, from around $1,700 to around $1,390, and even lower later.

    This time, the real interest rates have soared from around -1.0% to around 0.25% by the end of May. So far, gold’s response was rather limited, i.e., it declined from $2,039 to $1,810, or 11%. However, if we see further increases in the real rates, gold may continue its downward move. Given how high inflation is, the upswing in real interest rates has much further to go, and this is also what some Fed officials suggest. For example, Fed Governor Christopher Waller said at the end of May:

    If inflation doesn't go away, that (...) rate is going a lot higher, and soon (…). We are not going to sit there and wait six months (...). I am advocating 50 on the table every meeting until we see substantial reductions in inflation. Until we get that, I don’t see the point of stopping.

    However, every cloud has a silver lining. A large part of the upward move in the real interest rates is probably already behind us. I think that the bond yields may increase further, as both inflation and the Fed didn’t say the last word, but the move should be limited. The key difference between 2012-2013 and now is that the taper tantrum was accompanied by moderation of inflation and expectations of an acceleration in economic growth. Now, the Fed’s tightening cycle is occurring amid high inflation but also collapsing economic growth expectations and a slowdown in GDP growth. This is also what markets are betting on right now. They dialed back interest rate expectations, assuming that the worsening economic data might force the Fed to adopt a less aggressive stance.

    Moreover, the level of both private and public debt is much higher, which makes the economy more sensitive to interest rate hikes. Positive real interest rates imply the end of the era of ultra-low rates and ultra-easy money. All debtors, including the Treasury, will now have to pay more in interest. The tightening of financial conditions could put many borrowers in trouble. Hence, the macroeconomic environment is more supportive of gold prices than a decade ago.

    Indeed, so far we’ve had high inflation accompanied by fast economic growth. However, as I warned many times, the impressive pace of growth resulted simply from the rebound from a deep recession, and it was impossible to maintain. Hence, we are moving closer to stagflation, gold’s favorite macroeconomic conditions. Stagnation has been so far the missing part of the equation, which is why gold didn’t react positively to high inflation, but this may change in the future. In 2022, America should keep its head above water, but 2023 may be a truly challenging year – which bodes well, at least for gold.

    However, it may take some time before the new rally in gold starts. Prices should remain in a downward (or sideways) trend until the real interest rates reach a peak, as they did in 2008 (or at the end of 2018). They’ve retreated recently, as investors are focusing more on the risk of recession and less on inflation, but upward move in interest rates can resume after a while, especially if inflation is again above market expectations.

    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, 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.

  • Is There Any Gold in Virtual Worlds Like Metaverse?

    March 25, 2022, 6:47 AM

    Imagine all the people… living life in the Metaverse. Once we immerse ourselves in the digital sphere, gold may go out of fashion. Or maybe not?

    Do you already have your avatar? If not, maybe you should consider creating one, as the Metaverse is coming! What is the Metaverse? It is a digital, three-dimensional world where people are represented by avatars, a network of 3D virtual worlds focused on social connection, the next evolution of the internet, “extended reality,” and the latest buzzword in the marketplace since Facebook changed its name to Meta. If you still have no idea what I’m talking about, you can watch this educational video or just Spielberg’s Ready Player One.

    The idea of personalities being uploaded online is an intriguing concept, isn’t it? In this vision, people meet with others, play, and simply hang out in a digital world. Imagine friends turning group chats on Messenger or WhatsApp into group meetups in the Metaverse of family gatherings in virtual homes. Ultimately, people will probably be doing pretty much everything there, except eating, sleeping, and using the restroom.

    Sounds scary? For people in their 30s and older who were fascinated by The Matrix, it does. However, this is really happening. The augmented reality technology market is expected to grow from $47 billion in 2019 to $1.5 trillion in 2030, mainly thanks to the development of the Metaverse. China’s virtual goods and services market is expected to be worth almost $250 billion this year and $370 billion in the next four years.

    In a sense, it had to happen as the next phase of the digital revolution. You see, we now experience much of life on the two-dimensional screens of our laptops and smartphones. The Metaverse moves us from a flat and boring 2D to a 3D virtual universe, where we can visualize and experience things with a more natural user interface. Let’s take shopping as an example. Instead of purchasing items on Amazon, customers could enter a virtual shop, see and touch all products in 3D, and buy whatever they wanted (actually, Walmart launched its own 3D shopping experience in 2018).

    OK, we get the idea, but why does Metaverse matter, putting aside sociological or philosophical issues related to transferring our minds into the digital world? Well, it might strongly affect every aspect of business and life, just as the internet did earlier. Here are a couple of examples. Famous brands, like Dolce & Gabbana, are designing clothes and jewelry for the digital world. Some artists are giving concerts in virtual reality. You could also visit some museums virtually, and instead of taking a business trip, you can digitally teleport to remote locations to meet with your co-workers’ avatars.

    Finally, what does the Metaverse imply for the gold market? Well, it’s difficult to grasp all the possible implications right now. However, the main threat is clear: as people immerse deeper and deeper into the digital world, gold could become obsolete for many users. Please note that cryptocurrencies and non-fungible tokens (NFTs) are and will continue to be widely used as payment methods in the Metaverse.

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    However, there are some caveats here. First, the invention and spread of the internet didn’t sink gold. Actually, the internet enabled gold to be widely traded by investors all over the world. Just take a look at the chart below. Although gold was in a bear market in the 1990s and struggled during the dot-com bubble, it rallied after the bubble burst.

    Second, the digital world didn’t kill the analog reality. Despite digital streaming of music, vinyl record sales soared last year, reaching a record high in a few decades. The development of the Metaverse could trigger a similar backlash and a return to tangible goods like gold.

    Third, some segments of the Metaverse look like bubbles. Maybe I’m just too old, but why the heck would anybody spend hundreds of thousands, or even millions of dollars to buy items in the virtual world? These items include virtual real estates (CNBC says that sales of real estate in the metaverse topped $500 million last year and could double this year), digital pieces of art or even tweets (yup, the founder of Twitter sold the first tweet ever for just under $3 million)! It does not make any sense to me, as I can right-click and download a copy of the same digital files (like a PNG file of a grey pet rock) for which people pay thousands and millions of dollars.

    Of course, certain items could increase the utility of the game or virtual experience, but my bet is that at least some buyers simply speculate on prices, expecting that they will be able to resell these items to greater fools. When this digital gold rush ends – and given the Fed’s tightening cycle, it may happen in the not-so-distant future – real gold could laugh last.

    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, 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.

  • Inflation Will Settle Gold’s Future - Better Watch It Closely

    March 18, 2022, 9:35 AM

    Inflation continues to rise but may soon reach its peak. After that, its fate will be sealed: a gradual decline. Does the same await gold?If you like inviting people over, you’ve probably figured out that some guests just don’t want to leave, even when you’re showing subtle signs of fatigue. They don’t seem to care and keep telling you the same not-so-funny jokes. Even in the hall, they talk lively and tell stories for long minutes because they remembered something very important. Inflation is like that kind of guest still sitting in your living room, even after you turned off the music and went to wash the dishes, yawning loudly.

    Indeed, high inflation simply does not want to leave. Actually, it’s gaining momentum. As the chart below shows, core inflation, which excludes food and energy, rose 6.0% over the past 12 months, speeding up from 5.5% in the previous month. Meanwhile, the overall CPI annual rate accelerated from 7.1% in December to 7.5% in January.

    It’s been the largest 12-month increase since the period ending February 1982. However, at the time, Paul Volcker raised interest rates to double digits and inflation was easing. Today, inflation continues to rise, but the Fed is only starting its tightening cycle. The Fed’s strategy to deal with inflation is presented in the meme below.

    Obraz zawierający tekst, mężczyzna, znakOpis wygenerowany automatycznie

    What is important here is that the recent surge in inflation is broad-based, with virtually all index components showing increases over the past 12 months. The share of items with price rises of over 2% increased from less than 60% before the pandemic to just under 90% in January 2022.

    As the chart below shows, the index for shelter is constantly rising and – given the recent spike in “asking rents” – is likely to continue its upward move for some time, adding to the overall CPI. What’s more, the Producer Price Index is still red-hot, which suggests that more inflation is in the pipeline, as companies will likely pass on the increased costs to consumers.

    So, will inflation peak anytime soon or will it become embedded? There are voices that – given the huge monetary expansion conducted in response to the epidemic – high inflation will be with us for the next two or three years, especially when inflationary expectations have risen noticeably. I totally agree that high inflation won’t go away this year.

    Please just take a look at the chart below, which shows that the pandemic brought huge jumps in the ratio of broad money to GDP. This ratio has increased by 23%, from Q1 2020 to Q4 2021, while the CPI has risen only 7.7% in the same period. It suggests that the CPI has room for a further increase.

    What’s more, the pace of growth in money supply is still far above the pre-pandemic level, as the chart below shows. To curb inflation, the Fed would have to more decisively turn off the tap with liquidity and hike the federal funds rate more aggressively.

    However, as shown in the chart above, money supply growth peaked in February 2021. Thus, after a certain lag, the inflation rate should also reach a certain height. It usually takes about a year or a year and a half for any excess money to show up as inflation, so the peak could arrive within a few months, especially since some of the supply disruptions should start to ease in the near future.

    What does this intrusive inflation imply for the precious metals market? Well, the elevated inflationary pressure should be supportive of gold prices. However, I’m afraid that when disinflation starts, the yellow metal could suffer. The decline in inflation rates implies weaker demand for gold as an inflation hedge and also higher real interest rates.

    The key question is, of course, what exactly will be the path of inflation. Will it normalize quickly or gradually, or even stay at a high plateau after reaching a peak? I don’t expect a sharp disinflation, so gold may not enter a 1980-like bear market.

    Another question of the hour is whether inflation will turn into stagflation. So far, the economy is growing, so there is no stagnation. However, growth is likely to slow down, and I wouldn’t be surprised by seeing some recessionary trends in 2023-2024. Inflation should still be elevated then, creating a perfect environment for the yellow metal. Hence, the inflationary genie is out of the bottle and it could be difficult to push it back, even if inflation peaks in the near future.

    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, 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.

  • Gold Likes Recessions - Could High Interest Rates Lead to One?

    March 11, 2022, 10:22 AM

    We live in uncertain times, but one thing is (almost) certain: the Fed’s tightening cycle will be followed by an economic slowdown – if not worse.

    There are many regularities in nature. After winter comes spring. After night comes day. After the Fed’s tightening cycle comes a recession. This month, the Fed will probably end quantitative easing and lift the federal funds rate. Will it trigger the next economic crisis?

    It’s, of course, more nuanced, but the basic mechanism remains quite simple. Cuts in interest rates, maintaining them at very low levels for a prolonged time, and asset purchases – in other words, easy monetary policy and cheap money – lead to excessive risk-taking, investors’ complacency, periods of booms, and price bubbles. On the contrary, interest rate hikes and withdrawal of liquidity from the markets – i.e., tightening of monetary policy – tend to trigger economic busts, bursts of asset bubbles, and recessions. This happens because the amount of risk, debt, and bad investments becomes simply too high.

    Historians lie, but history – never does. The chart below clearly confirms the relationship between the Fed’s tightening cycle and the state of the US economy. As one can see, generally, all recessions were preceded by interest rate hikes. For instance, in 1999-2000, the Fed lifted the interest rates by 175 basis points, causing the burst of the dot-com bubble. Another example: in the period between 2004 and 2006, the US central bank raised rates by 425 basis points, which led to the burst of the housing bubble and the Great Recession.

    One could argue that the 2020 economic plunge was caused not by US monetary policy but by the pandemic. However, the yield curve inverted in 2019 and the repo crisis forced the Fed to cut interest rates. Thus, the recession would probably have occurred anyway, although without the Great Lockdown, it wouldn’t be so deep.

    However, not all tightening cycles lead to recessions. For example, interest rate hikes in the first half of the 1960s, 1983-1984, or 1994-1995 didn’t cause economic slumps. Hence, a soft landing is theoretically possible, although it has previously proved hard to achieve. The last three cases of monetary policy tightening did lead to economic havoc.

    It goes without saying that high inflation won’t help the Fed engineer a soft landing. The key problem here is that the US central bank is between an inflationary rock and a hard landing. The Fed has to fight inflation, but it would require aggressive hikes that could slow down the economy or even trigger a recession. Another issue is that high inflation wreaks havoc on its own. Thus, even if untamed, it would lead to a recession anyway, putting the economy into stagflation. Please take a look at the chart below, which shows the history of US inflation.

    As one can see, each time the CPI annul rate peaked above 5%, it was either accompanied by or followed by a recession. The last such case was in 2008 during the global financial crisis, but the same happened in 1990, 1980, 1974, and 1970. It doesn’t bode well for the upcoming years.

    Some analysts argue that we are not experiencing a normal business cycle right now. In this view, the recovery from a pandemic crisis is rather similar to the postwar demobilization, so high inflation doesn’t necessarily imply overheating of the economy and could subsidy without an immediate recession. Of course, supply shortages and pent-up demand contributed to the current inflationary episode, but we shouldn’t forget about the role of the money supply. Given its surge, the Fed has to tighten monetary policy to curb inflation. However, this is exactly what can trigger a recession, given the high indebtedness and Wall Street’s addiction to cheap liquidity.

    What does it mean for the gold market? Well, the possibility that the Fed’s tightening cycle will lead to a recession is good news for the yellow metal, which shines the most during economic crises. Actually, recent gold’s resilience to rising bond yields may be explained by demand for gold as a hedge against the Fed’s mistake or failure to engineer a soft landing.

    Another bullish implication is that the Fed will have to ease its stance at some point in time when the hikes in interest rates bring an economic slowdown or stock market turbulence. If history teaches us anything, it is that the Fed always chickens out and ends up less hawkish than it promised. In other words, the US central bank cares much more about Wall Street than it’s ready to admit and probably much more than it cares about inflation.

    Having said that, the recession won’t start the next day after the rate liftoff. Economic indicators don’t signal an economic slump. The yield curve has been flattening, but it’s comfortably above negative territory. I know that the pandemic has condensed the last recession and economic rebound, but I don’t expect it anytime soon (at least rather not in 2022). It implies that gold will have to live this year without the support of the recession or strong expectations of it.

    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, 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.

  • Fed’s Tightening Cycle: Bullish or Bearish for Gold?

    March 4, 2022, 9:36 AM

    This month, the Fed is expected to hike interest rates. Contrary to popular belief, the tightening doesn't have to be adverse for gold. What does history show?

    March 2022 – the Fed is supposed to end its quantitative easing and hike the federal funds rate for the first time during recovery from a pandemic crisis . After the liftoff, the Fed will probably also start reducing the size of its mammoth balance sheet and raise interest rates a few more times. Thus, the tightening of monetary policy is slowly becoming a reality. The golden question is: how will the yellow metal behave under these conditions?

    Let’s look into the past. The last tightening cycle of 2015-2019 was rather positive for gold prices. The yellow metal rallied in this period from $1,068 to $1,320 (I refer here to monthly averages), gaining about 24%, as the chart below shows.

    What’s really important is that gold bottomed out in December 2015, the month of the liftoff. Hence, if we see a replay of this episode, gold should detach from $1,800 and go north, into the heavenly land of bulls. However, in December 2015, real interest rates peaked, while in January 2016, the US dollar found its local top. These factors helped to catapult gold prices a few years ago, but they don’t have to reappear this time.

    Let’s dig a bit deeper. The earlier tightening cycle occurred between 2004 and 2006, and it was also a great time for gold, despite the fact that the Fed raised interest rates by more than 400 basis points, something unthinkable today. As the chart below shows, the price of the yellow metal (monthly average) soared from $392 to $634, or more than 60%. Just as today, inflation was rising back then, but it was also a time of great weakness in the greenback, a factor that is currently absent.

    Let’s move even further back into the past. The Fed also raised the federal funds rate in the 1994-1995 and 1999-2000 periods. The chart below shows that these cases were rather neutral for gold prices. In the former, gold was traded sideways, while in the latter, it plunged, rallied, and returned to a decline. Importantly, just as in 2015, the yellow metal bottomed out soon after the liftoff in early 1999.

    In the 1980s, there were two major tightening cycles – both clearly negative for the yellow metal. In 1983-1984, the price of gold plunged 29% from $491 to $348, despite rising inflation, while in 1988-1989, it dropped another 12%, as you can see in the chart below.

    Finally, we have traveled back in time to the Great Stagflation period! In the 1970s, the Fed’s tightening cycles were generally positive for gold, as the chart below shows. In the period from 1972 to 1974, the average monthly price of the yellow metal soared from $48 to $172, or 257%. The tightening of 1977-1980 was an even better episode for gold. Its price skyrocketed from $132 to $675, or 411%. However, monetary tightening in 1980-1981 proved not very favorable , with the yellow metal plunging then to $409.

    What are the implications of our historical analysis for the gold market in 2022? First, the Fed’s tightening cycle doesn’t have to be bad for gold. In this report, I’ve examined nine tightening cycles – of which four were bullish, two were neutral, and three were bearish for the gold market. Second, all the negative cases occurred in the 1980s, while the two most recent cycles from the 21st century were positive for gold prices. It bodes well for the 2022 tightening cycle.

    Third, the key is, as always, the broader macroeconomic context – namely, what is happening with the US dollar, inflation, and real interest rates. For example, in the 1970s, the Fed was hiking rates amid soaring inflation. However, in March 1980, the CPI annul rate peaked, and a long era of disinflation started. This is why tightening cycles were generally positive in the 1970s, and negative in the 1980s.

    Hence, it seems on the surface that the current tightening should be bullish for gold, as it is accompanied by high inflation. However, inflation is expected to peak this year. If this happens, real interest rates could increase even further, creating downward pressure on gold prices. Please remember that the real federal funds rate is at a record low level. If inflation peaks, gold bulls’ only hope will be either a bearish trend in the US dollar (amid global recovery and ECB’s monetary policy tightening) or a dovish shift in market expectations about the path of the interest rates, given that the Fed’s tightening cycle has historically been followed by an economic slowdown or recession.

    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, 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.

  • Should We Prepare For the Worst and Buy Some Gold?

    February 25, 2022, 8:22 AM

    As the COVID-19 pandemic has shown, it is worth being better prepared for a possible crisis. Does that mean it pays to have some gold up your sleeve?

    I have to confess something. I always laughed at preppers (aka survivalists) – people who spend their entire lives stockpiling beans and ammo in preparation for the highly unlikely doomsday scenarios. C’mon, who would take these freaks seriously? Well, as the pandemic and supply crisis showed us, we all should.

    When most people scrambled for masks and hand sanitizers, preppers laughed. When most people fought epic battles for toilet paper and something to eat to survive the Great Lockdown, preppers laughed. When most people were confronted with surging inflation and supply shortages of different products, preppers laughed. When most people panicked upon hearing about energy blackouts, preppers laughed. It seems that mocked preppers got the last laugh, after all.

    Hence, the COVID-19 epidemic made it clear that the world is not a paradise flowing with milk and honey and that bad things do really happen, so we should be more prepared for possible calamities, even if they look like remote possibilities. For example, experts now point out the threat of cyberattacks, and just last month, Kazakhstan’s government turned off the internet nationwide, depriving its citizens of access to their bank accounts.

    The problem is, of course, that crises always seem highly unlikely until they occur. Meanwhile, historical cases are too distant and abstract for us, and we tend to think that “this time is different”, or that “we’ll make it through somehow.” Perhaps you will, but it’s much easier when you are prepared. When other people panic, you don’t, because you have made your preparation and have a clear plan of action.

    You see, the issue is not if the crisis hits, but when. It’s just a matter of time, even the government suggests storing at least a several-day supply of non-perishable food. However, the problem is that when things are going well, people don’t think about preparing. Why should we worry and spoil the fun? Let’s drink like tomorrow never comes! Maybe the problem will somehow disappear by itself, and if it doesn’t, we’ll deal with it later.

    I got it, but how does it all relate to gold? Well, quite simply. Owning gold is a part of preparing for the worst. This is because gold is the store of value that appreciates when confidence in fiat money declines. It’s also a safe-haven asset, which shines during financial crises when asset prices generally decline. The best example may be the Great Recession or 2020 economic crisis when gold performed much better than the S&P 500 Index, as the chart below shows.

    You can also think of gold as a portfolio insurance policy or a hedge against tail risks. A house fire is not very likely, but it’s generally smart to have insurance, you know, just in case. Similarly, the collapse of the financial markets and the great plunge of asset prices are not of great probability (although the Great Depression, late 2008, and early 2020 show that they are clearly possible), but it’s nice to have a portfolio diversifier that is not afraid of black swans.

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    In a sense, the whole issue boils down to individual responsibility. Do you take responsibility for your life and for being prepared for different scenarios, or do you count on other people, the government, or simply luck, magically thinking that everything always goes well? To be clear, being prepared doesn’t equal being pessimistic – it’s rather about being realistic and hoping for the best, but planning for the worst.

    However, there are two important caveats to consider before exchanging all of your paper currency for gold coins. First, you shouldn’t conflate holding gold as insurance with gold as an investment asset. When you want protection, you’re not interested in price trends. There might be a bear market, but gold would still fulfill its hedging role. This is also why you shouldn’t own more than about 5-10% of your whole portfolio in precious metals (as insurance, you can invest more in gold as an investment or as a part of your trading strategy).

    Second, don’t treat gold as a panacea for all possible disasters. It all depends on what you are preparing for. If you expect power outages, buy batteries, power banks, and think about alternate sources of energy. Precious metals won’t power your home. If you fear a zombie apocalypse (who doesn’t?), flamethrowers and rifles seem to be better weapons than gold bars (although large ones can serve quite well). If you can’t wait for a nuclear explosion (who can?), you will need a proper shelter with uncontaminated food rather than shiny metal (pun intended). It’s possible that in such a post-apocalyptic world, people would initially return to a commodity-based standard rather than the gold standard. It all depends on the particular conditions and how deeply the civilization would devolve.

    Hence, don’t be scared by dodgy people and false advertising into buying gold because of imminent hyperinflation, the total collapse of the financial system, nuclear greetings from Kim Jong-Un, or another calamity. The role of gold is not to rescue you from all kinds of troubles, but to be insurance that pays off during economic crises.

    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, 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.

  • Inflation Peak – High Risk or Opportunity for Gold?

    February 18, 2022, 9:38 AM

    Not only won’t inflation end soon, it’s likely to remain high. Whether gold will be able to take advantage of it will depend, among others, on the Fed.

    Do you sometimes ask yourself when this will all end? I don’t mean the universe, nor our lives, nor even this year (c’mon, guys, it has just started!). I mean, of course, inflation. If only you weren’t in a coma last year, you would have probably noticed that prices had been surging recently. For instance, America finished the year with a shocking CPI annual rate of 7.1%, the highest since June 1982, as the chart below shows.

    Now, the key question is how much higher inflation could rise, or how persistent it could be. The consensus is that we will see a peak this year and subsequent cooling down, but to still elevated levels. This is the view I also hold. However, would I bet my collection of precious metals on it? I don’t know, as inflation could surprise us again, just as it did to most of the economists (but not me) last year. The risk is clearly to the upside.

    As always in economics, it’s a matter of supply and demand. There is even a joke that all you need to turn a parrot into an economist is to teach it to say ‘supply’ and ‘demand’. Funny, huh? When it comes to the demand side, both the money supply growth and the evolution of personal saving rate implies some cooling down of inflation rate.

    Please take a look at the chart below. As you can see, the broad money supply peaked in February 2021. Assuming a one-year lag between the money supply and price level, inflation rate should reach its peak somewhere in the first quarter of this year.

    There is one important caveat here: the pace of money supply growth has not returned to the pre-pandemic level, but it stabilized at about 13%, double the rate seen at the end of 2019. Inflation was then more or less at the Fed’s target of 2%, so without constraining money supply growth, the US central bank couldn’t beat inflation.

    As the chart above also shows, the personal saving rate has returned to the pre-pandemic level of 7-8%. It means that the bulk of pent-up demand has already materialized, which should also help to ease inflation in the future. However, not all of the ‘forced savings’ have already entered the market. Thus, personal consumption expenditures are likely to be elevated for some time, contributing to boosted inflation.

    Regarding supply factors, although some bottlenecks have eased, the disruptions have not been fully resolved. The spread of the Omicron variant of the coronavirus and regional lockdowns in China could prolong the imbalances between booming demand and constrained supply. Other contributors to high inflation are rising producer prices, increasing house prices and rents, strong inflation expectations (see the chart below), and labor shortages combined with fast wage growth.

    The bottom line is that, all things considered – in particular high level of demand, continued supply issues, and de-anchored inflation expectations – I forecast another year of elevated inflation, but probably not as high as in 2021. After reaching a peak in a few months, the inflation rate could ease to, let’s say, around 4% in December, if we are lucky. Importantly, the moderate bond yields also suggest that inflation will ease somewhat later in 2022.

    What does it mean for the gold market? Well, I don’t have good news for the gold bulls. Gold loves high and accelerating inflation the most. Indeed, as the chart below shows, gold peaks coincided historically with inflation heights. The most famous example is the inflation peak in early 1980, when gold ended its impressive rally and entered into a long bearish trend. The 2011 top also happened around the local inflationary peak.

    The only exception was the 2005 peak in inflation, when gold didn’t care and continued its bullish trend. However, this was partially possible thanks to the decline in the US dollar, which seems unlikely to repeat in the current macroeconomic environment, in which the Fed is clearly more hawkish than the ECB or other major central banks. The relatively strong greenback won’t help gold shine.

    Surely, disinflation may turn out to be transitory and inflation may increase again several months later. Lower inflation implies a less aggressive Fed, which should be supportive of gold prices. However, investors should remember that the US central bank will normalize its monetary policy no matter the inflation rate. Since the Great Recession, inflation has been moderate, but the Fed has tightened its stance eventually, nevertheless. Hence, gold may experience a harsh moment when inflation peaks.

    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, 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 Geopolitical Threats for 2022: Is Gold in Danger Too?

    February 11, 2022, 11:56 AM

    As in previous years, geopolitical tensions are likely to have an impact on the markets in 2022. As a “safe haven”, gold probably won’t be omitted.

    Do you have déjà vu? I’m only experiencing one. As you probably remember, January 2020 was a period of vivid geopolitical risks, such as the U.S.-Iran conflict and the North Korea problem. Antonio Guterres, Secretary-General of the United Nations, described these tensions as the highest since 2017. Now, in 2022, here we are again - we have great geopolitical threats ahead of us.

    Everyone knows about the renewed tensions between Russia and Ukraine. The former country amassed more than 100,000 troops and military equipment near the border by December 2021, which represents the highest force mobilization since the annexation of Crimea in 2014. In response, NATO sent ships and fighter jets to Eastern Europe and put forces on standby. The risk of Russian invasion and military conflict (which could trigger a response by the US and NATO) worried investors, which possibly spurred some safe-haven demand for gold.

    However, the support for the yellow metal may at be short-lived. As the chart below shows, gold soared in February-March 2014, when the annexation of Crimea took place. Its rally started in early February (other factors were also in play then), much before the Crimean crisis, and it quickly ended in mid-March. Gold returned to its long-term bearish trend.

    Of course, this time may be different, especially since the West seems to be more ready to help Ukraine than in 2014. However, close economic ties between Germany and Russia make it difficult to achieve unity, and I suspect that the West won’t fight for Ukraine to the last drop of blood (especially given that the country is not even in NATO). Some countries have already started the evacuation of their embassies in Kiev, the Ukrainian capital, which tells us something. However, the marginally higher risk of US military involvement should be more supportive of gold prices, although I wouldn’t buy gold driven solely by the risk of conflict.

    The second major conflict that glows in the background is the risk of a potential Chinese invasion of Taiwan. Last year, tensions between China and the island escalated and some experts say that military execution of the “One China” policy is only a matter of time. Taiwan was always a thorn in China’s side, but the country was too weak to do anything about it. However, China’s military power has radically expanded over recent years.

    Such a conflict could also temporarily support gold prices, especially since Taiwan has a military alliance with the US and the Pacific crisis could aggravate supply chain disruptions. Another potentially bullish factor could be the lack of any recent track record of China’s military actions and, thus, greater uncertainty compared to the long history of Russia’s military operations and of good old America’s conflicts with the Soviet Union.

    Third, there might be an important cyberattack. I know, it sounds almost cliché, as everyone points to this risk. However, after the pandemic, this is one of the greatest threats, according to many experts. This year, we have already seen a cyberattack on Ukrainian government websites as well as a cyber incident that affected Canada’s foreign ministry. Let’s also not forget about Kazakhstan, where the government shut off the internet nationwide in response to civil unrest seen last month.

    The last event is more an example of digital authoritarianism rather than a cyberattack, but the result is the same: digital paralysis with huge implications for people’s daily lives. Indeed, guess what happens when people don’t have access to the internet. Yes, they can’t’ check social media for the newest memes with funny puppies, but that’s not the greatest problem (really!). One of the most ominous results is that people don’t have access to their digital bank accounts, i.e., most of their money, which is nowadays generally in electronic form.

    This is why it’s smart to do some preparations for worst-case scenarios and always have some cash on hand – and perhaps also some gold bullion, although I suspect that it would be easier to buy groceries with fiat currencies. This is also why cryptocurrencies will probably never replace gold. In our highly digital world, it’s good to hold onto something tangible.

    Of course, geopolitical threats are more numerous. I’ve not mentioned Iran’s nuclear advances, the flexing of North Korea’s military muscle, the more virulent, deadly, and vaccine-resistant mutation of the coronavirus (oh boy, that sounds really great, doesn’t it?), the U.S. mid-term elections, environmental risks, mass migration, etc. One thing is certain: geopolitical tensions have intensified recently.

    As a safe-haven asset, the yellow metal tends to thrive in periods of high uncertainty. However, geopolitical events usually trigger only short-lived reactions in the precious metals markets, especially if they don’t threaten the United States and its economy directly. This is because all tensions eventually ease, and all conflicts are followed by some kind of settlements. When this happens, there is a sigh of relief, and the upbeat prices of safe havens, including gold, undergo a correction.

    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, 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 the Fed Tighten Gold? The Consequences Might Be Ignoble

    February 4, 2022, 8:11 AM

    Beware, the Fed’s tightening of monetary policy could lift real interest rates! For gold, this poses a risk of prices wildly rolling down.

    The first FOMC meeting in 2022 is behind us. What can we expect from the US central bank this year and how will it affect the price of gold? Well, this year’s episode of Fed Street will be sponsored by the letter “T”, which stands for “tightening”. It will consist of three elements.

    First, quantitative easing tapering. The asset purchases are going to end by early March. To be clear, during tapering, the Fed is still buying securities, so it remains accommodative, but less and less. Tapering has been very gradual and well-telegraphed to the markets, so it’s probably already priced in gold. Thus, the infamous taper tantrum shouldn’t replay.

    Second, quantitative tightening. Soon after the end of asset purchases, the Fed will begin shrinking its mammoth balance sheet. As the chart below shows, it has more than doubled since the start of the pandemic, reaching about $9 trillion, or about 36% of the country’s GDP. It’s so gigantic that even Powell admitted during his January press conference that “the balance sheet is substantially larger than it needs to be.” Captain Obvious attacked again!

    In contrast to tapering, which just reduces additions to the Fed’s holdings, quantitative tightening will shrink the balance sheet. How much? It’s hard to say. Last time, during QT from 2017 to 2019, the Fed started unloading $10 billion in assets per month, gradually lifting the cap to $50 billion.

    Given that inflation is now much higher, and the Fed has greater confidence in the economic recovery, the scale of reduction would probably be higher. The QT will create upward pressure on interest rates, which could be negative for the gold market.

    However, QT will be a very gradual and orderly process. Instead of selling assets directly, the US central bank will stop reinvestment of proceeds as securities run off. As we can read in “Principles for Reducing the Size of the Federal Reserve's Balance Sheet”,

    The Committee intends to reduce the Federal Reserve's securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account.

    What’s more, the previous case of QT wasn’t detrimental to gold, as the chart below shows. The price of gold started to rally in late 2018 and especially later in mid-2019.

    Third, the hiking cycle. In March, the Fed is going to start increasing the federal funds rate. According to the financial markets, the US central bank will enact five interest rate hikes this year, raising the federal funds rate to the range of 1.25-1.50%.

    Now, there are two narratives about American monetary policy in 2022. According to the first, we are witnessing a hawkish revolution within the Fed, as it would shift its monetary stance in a relatively short time. The central bank will “double tighten” (i.e., it will shrink its balance sheet at the same time as hiking rates), and it will do it in a much more aggressive way than after the Great Recession. Such decisive moves will significantly raise the bond yields, which will hit gold prices. However, in this scenario, the Fed’s aggressive actions will eventually lead to the inversion of the yield curve and later to recession, which should support the precious metals market.

    On the other hand, some analysts point out that central bankers are all talk and – given their dovish bias – act less aggressively than they promise, chickening out in the face of the first stock market turbulence. They also claim that all the Fed’s actions won’t be enough to combat inflation and that monetary conditions will remain relatively loose. For example, Stephen Roach argues that “the Fed is so far behind [the curve] that it can’t even see the curve.” Indeed, the real federal funds rate is deeply negative (around -7%), as the chart below shows; and even if inflation moderates to 3.5% while the Fed conducts four hikes, it will remain well below zero (about -2%), providing some support for gold prices.

    Which narrative is correct? Well, there are grains of truth in both of them. However, I would like to remind you that what really matters for the markets is the change or direction, not the level of a variable. Hence, the fact that real interest rates are to stay extremely low doesn’t guarantee that gold prices won’t decline in a response to the hiking cycle.

    Actually, as the chart above shows, the upward reversal in the real interest rates usually plunges gold prices. Given that real rates are at a record low, a normalization is still ahead of us. Hence, unless inflation continues to rise, bond yields are likely to move up, while gold – to move down.

    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, 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 in 2022: Between Inflationary Rock and Hard Fed

    January 28, 2022, 4:09 AM

    Gold’s fate in 2021 will be determined mainly by inflation and the Fed’s reaction to it.

    In the epic struggle between chaos and order, chaos has an easier task, as there is usually only one proper method to do a job – the job that you can screw up in many ways. Thus, although economists see a strong economic expansion with cooling prices and normalization in monetary policies in 2022, many things could go wrong. The Omicron strain of coronavirus or its new variants could become more contagious and deadly, pushing the world into the Great Lockdown again. The real estate crisis in China could lead the country into recession, with serious economic consequences for the global economy. Oh, by the way, we could see an escalation between China and Taiwan, or between China and the US, especially after the recent test of hypersonic missiles by the former country.

    Having said that, I believe that the major forces affecting the gold market in 2022 will be – similarly to last year’s – inflation and the Fed’s response to it. Considering things in isolation, high inflation should be supportive of gold prices. The problem here is that gold prefers high and rising inflation. Although the inflation rate should continue its upward move for a while, it’s likely to peak this year.

    Indeed, based on very simple monetarist reasoning, I expect the peak to be somewhere in the first quarter of 2022. This is because the lag between the acceleration in money supply growth (March 2020) and CPI growth (March 2021) was a year. The peak in the former occurred in February 2021, as the chart below shows. You can do the math (by the way, this is the exercise that turned out to be too difficult for Jerome Powell and his “smart” colleagues from the Fed).

    This is – as I’ve said – very uncomplicated thinking that assumes the stability of the lag between monetary impulses and price reactions. However, given the Fed’s passive reaction to inflation and the fact that the pace of money supply growth didn’t return to the pre-pandemic level, but stayed at twice as high, the peak in inflation may occur later.

    In other words, more persistent inflation is the major risk for the economy that many economists still downplay. The consensus expectation is that inflation returns to a level close to the Fed’s target by the end of the year. For 2021, the forecasts were similar. Instead, inflation has risen to about 7%. Thus, never underestimate the power of the inflation dragon, especially if the beast is left unchecked! As everyone knows, dragons love gold – and this feeling is mutual.

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    The Saxo Bank, in its annual “Outrageous Predictions”, sees the potential for US consumer prices to rise 15% in 2022, as “companies bid up wages in an effort to find willing and qualified workers, triggering a wage-price spiral unlike anything seen since the 1970’s”. Actually, given the fact that millions of Americans left the labor market – which the Fed doesn’t understand and still expects that they will come back – this prediction is not as extreme as one could expect. I still hope that inflationary pressure will moderate this year, but I’m afraid that the fall may not be substantial.

    On the other hand, we have the Fed with its hawkish rhetoric and tapering of quantitative easing. The US central bank is expected to start a tightening cycle, hiking the federal funds rate at least twice this year. It doesn’t sound good for gold, does it? A hawkish Fed implies a stronger greenback and rising real interest rates, which is negative for the yellow metal. As the chart below shows, the normalization of monetary policy after the Great Recession, with the infamous “taper tantrum”, was very supportive of the US dollar but lethal for gold.

    However, the price of gold bottomed in December 2015, exactly when the Fed hiked the interest rates for the first time after the global financial crisis. Markets are always future-oriented, so they often react more to expected rather than actual events. Another thing is that the Fed’s tightening cycle of 2015-2018 was dovish and the federal funds rate (and the Fed’s balance sheet) never returned to pre-crisis levels. The same applies to the current situation: despite all the hawkish reactions, the Fed is terribly behind the curve.

    Last but not least, history teaches us that a tightening Fed spells trouble for markets. As a reminder, the last tightening cycle led to the reversal of the yield curve in 2019 and the repo crisis, which forced the US central bank to cut interest rates, even before anyone has heard of covid-19. Hence, the Fed is in a very difficult situation. It either stays behind the curve, which risks letting inflation get out of control, or tightens its monetary policy in a decisive manner, just like Paul Volcker did in the 1980s, which risks a correction of already-elevated asset prices and the next economic crisis. Such expectations have boosted gold prices since December 2015, and they could support the yellow metal today as well.

    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, 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: 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 Slides and Rebounds in 2022

    January 21, 2022, 6:14 PM

    My outlook for the gold market in 2022 suffers from manic depression: I see first a period of despair and an elevated mood later.

    So, 2021 is over! 2022 will be better, right? Yeah, for sure! Just relax, what bad could happen?

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    Seriously, what can we expect from this year? I see a few key trends that are going to shape 2022, and their names are: Death, Famine, Pestilence, and War. Oh, sorry, the wrong list! At least I hope so… I meant, of course: economic recovery, inflation, and the Fed’s tightening cycle. Let’s examine them in detail.

    First, there will be the end of the pandemic (or, actually, its most acute phase) and a return to normal economic conditions. In some aspects, such as the GDP, the economy has already recovered from the 2020 economic crisis (as the chart below shows). However, broad population immunity and new drugs will limit the economic impact of coronavirus (the virus won’t disappear and will become endemic) in the future. What’s more, the global economy is likely to solve most of the supply problems that emerged last year (although not immediately). The return to normalcy should support risk appetite while hitting the safe-haven assets such as gold.

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    To be clear, I do expect a further deceleration in the pace of economic growth, but it should remain positive or even above the trend. In other words, although inflation will stay elevated, I don’t see stagflation coming in 2022. It means that the most favorable scenario for the gold bulls won’t materialize.

    Second, inflation is likely to peak somewhere in the first half of this year to get down later. To be clear, inflation won’t disappear on its own; its taming will depend on resolving supply problems and, even more, on appropriately hawkish actions from the Fed. You see, inflation results mainly from the surge in the broad money supply that boosted demand much above the supply. Although fixed bottlenecks will help to ease pressure on the supply, they won’t erase all the newly created money that entered the economy last year. Inflation is, thus, likely to stay elevated in 2022 as well. Inflationary pressure should support gold prices. However, when inflation peaks and disinflation sets in, demand for gold as an inflation hedge will drop.

    Third, the Fed will turn more hawkish. Powell has already admitted that the narrative about transitory inflation should be abandoned. Thus, it seems that the US central bank finally understood that it had to react to rising inflation, so it already accelerated the pace of tapering of quantitative easing. Hence, in 2022, the Fed will end its asset purchases and start raising the federal funds rate. The prospects of the Fed’s tightening cycle will put downward pressure on gold, just as they did last year.

    Let’s sum up. The economy should normalize and grow further next year, while inflation should reach its peak. Both monetary and fiscal policies will become tighter. In particular, the Fed will hike interest rates, probably twice, or even three times. In consequence, the US dollar should strengthen, especially given the ECB’s dovish stance, while bond yields should increase. Indeed, a more hawkish monetary policy combined with inflation reaching a plateau implies rising real interest rates. Holy Krugerrand, it does not sound like a dreamland for gold! Actually, gold is likely to struggle, and we could see an important slide in prices.

    However, the bullish case is not doomed. First, inflation could be more persistent than we all think, so it could peak rather later than sooner this year. Stubbornly high inflation would keep real interest rates deeply in negative territory, which should support gold prices.

    Second, economic growth could also surprise us negatively. I mean here, for example, the fact that the unemployment rate seems to be close to its bottom (as the chart below shows), so the room for further improvements seems to be limited. Elevated inflation, supply problems, and the Fed’s tightening cycle increase the odds of the next financial crisis or even a recession. However, it’s rather a matter of a future beyond 2022.

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    Third, gold reached its bottom in December 2015 when the Fed hiked interest rates for the first time since the Great Recession. Thus, if this history replays, the actual beginning of the Fed’s tightening cycle could, in fact, be positive for gold prices, contrary to prospects of hikes.

    Hence, my baseline scenario for this year is that gold will struggle in the first months of the year and slide to the bottom around the Fed’s first hike, which will occur sometime in the spring. The main downside risk is that this year’s tightening cycle will be worse for gold than in 2015-2019, while the major upside risk is that inflation worries will strengthen or even dominate the marketplace.

    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, 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: 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 Wars: Revenge of Supply and Inflation

    January 14, 2022, 10:24 AM

    Inflation! The Republic is crumbling under attacks by the ruthless Supply Lord, Count Shortage. Dearness is everywhere. Will gold save the galaxy?

    If George Lucas were to make a movie about 2021 instead of Jedi knights, he would probably call it Revenge of the Supply. After all, last year will be remembered as the period of semiconductor shortages, production bottlenecks, disrupted value chains, delayed deliveries, surging job vacancies, rising inflation, and skyrocketing energy prices. It could be a shocking discovery for Keynesian economists, who focus on aggregate demand and believe that there is always slack in the economy, but it turned out that supply matters too!

    As a reminder, state governments couldn’t deal with the pandemic more smartly and introduced lockdowns. Then, it turned out – what a surprise! – that the shutdown of the economy, well, shut down the economy, so the Fed and the banking system boosted the money supply, while Congress passed a mammoth fiscal stimulus, including sending checks to just about every American.

    In other words, 2021 showed us that one cannot close and reopen the economy without any negative consequences, as the economy doesn’t simply return to the status quo. After the reopening of the economy, people started to spend all the money that was “printed” and given to them. Hence, demand increased sharply, and supply couldn’t keep up with the boosted spending.

    It turned out that economic problems are not always related to the demand side that has to be “stimulated”. We’ve also learned that there are supply constraints and that production and delivery don’t always go smoothly. The contemporary economy is truly global, complex, and interconnected – and the proper working of this mechanism depends on the adequate functioning of its zillion elements. Thus, shit happens from time to time. This is why it’s smart to have some gold as a portfolio insurance against tail risks.

    Evergiven, the ship that blocked the Suez Canal, disrupting international trade, was the perfect illustration. However, the importance of supply factors goes beyond logistics and is related to regulations, taxes, incentives, etc. Instead of calls for injecting liquidity during each crisis, efficiency, reducing the disincentives to work and invest, and unlocking the supply shackles imposed by the government should become the top economic priority.

    Another negative surprise for mainstream economists in 2021 was the revenge of inflation. For years, central bankers and analysts have dismissed the threat of inflation, considering it a phenomenon of the past. In the 1970s, the Fed was still learning how to conduct monetary policy. It made a few mistakes, but is much smarter today, so stagflation won’t repeat. Additionally, we live in a globalized economy with strong product competition and weak labor unions, so inflation won’t get out of control.

    Indeed, inflation was stubbornly low for years, despite all the easy monetary policy, and didn’t want to reach the Fed’s target of 2%, so the US central bank changed its regime to be more flexible and tolerant of inflation. It was in 2020, just one year before the outbreak of inflation. The Fed completely didn’t expect that – which shows the intellectual poverty of this institution – and called it “transitory”.

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    Initially, inflation was supposed to be short-lived because of the “base effects”, then because of the “supply bottlenecks”. Only in November, the Fed admitted that inflation was more broad-based and would be more persistent than it previously thought. Well, better late than never!

    What does the revenge of supply and inflation imply for the gold market? One could expect that gold would perform better last year amid all the supply problems and a surge in inflation. We’ve learned that gold doesn’t always shine during inflationary times. The reason was that supply shortages didn’t translate into a full-blown economic crisis. On the contrary, they were caused by a strong rebound in demand; and they contributed mainly to higher inflation, which strengthened the Fed’s hawkish rhetoric and expectations of higher interest rates, creating downward pressure on gold prices.

    On the other hand, we could say as well that gold prices were supported by elevated inflation and didn’t drop more thanks to all the supply disruptions and inflationary threats. After all, during the economic expansion of 2011-2015 that followed the Great Recession, gold plunged about 45%, while between the 2020 peak and the end of 2021, the yellow metal lost only about 13%, as the chart below shows.

    Hence, the worst might be yet to come. I don’t expect a similarly deep decline as in the past, especially given that the Fed’s tightening cycle seems to be mostly priced in, but the real interest rates could normalize somewhat. Thus, I have bad news for the gold bulls. The supply crunch is expected to moderate in the second half of 2022, which would also ease inflationary pressure. To be clear, inflation won’t disappear, but it may reach a peak this year. The combination of improvement on the supply side of the economy, with inflation reaching its peak, and with a more hawkish Fed doesn’t bode well 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, 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: 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 Market in 2022: Fall and Revival?

    January 7, 2022, 10:19 AM

    2021 will be remembered as the year of inflation’s comeback and gold’s dissatisfying reaction to it. Will gold improve its behavior in 2022?

    You thought that 2020 was a terrible year, but we would be back to normal in 2021? Well, we haven’t quite returned to normal. After all, the epidemic is not over, as new strains of coronavirus emerged and spread last year. Actually, in some aspects, 2021 was even worse than 2020. Two years ago, the pandemic was wreaking havoc. Last year, both the pandemic and inflation were raging.

    To the great surprise of mainstream economists fixated on aggregate demand, 2021 would be recorded in chronicles as the year of the supply factors revenge and the great return of inflation. For years, the pundits have talked about the death of inflation and mocked anyone who pointed to its risk. Well, he who laughs last, laughs best. However, it’s laughter through inflationary tears.

    Given the highest inflation rate since the Great Stagflation, gold prices must have grown a lot, right? Well, not exactly. As the chart below shows, 2021 wasn’t the best year for the yellow metal. Gold lost almost 5% over the last twelve months. Although I correctly predicted that “gold’s performance in 2021 could be worse than last year”, I expected less bearish behavior.

    What exactly happened? From a macroeconomic perspective, the economy recovered last year. As vaccination progressed, sanitary restrictions were lifted, and risk appetite returned to the market, which hit safe-haven assets such as gold. What’s more, a rebound in economic activity and rising inflation prompted the Fed to taper its quantitative easing and introduce more hawkish rhetoric, which pushed gold prices down.

    As always, there were both ups and downs in the gold market last year. Gold started 2021 with a bang, but began plunging quickly amid Democrats’ success in elections, the Fed more optimistic about the economy, and rising interest rates. The slide lasted until late March, when gold found its bottom of $1,684. This is because inflation started to accelerate at that point, while the Fed was downplaying rising price pressures, gibbering about “transitory inflation”.

    The rising worries about high inflation and the perspective of the US central bank staying behind the curve helped gold reach $1,900 once again in early June. However, the hawkish FOMC meeting and dot-plot that came later that month created another powerful bearish wave in the gold market that lasted until the end of September.

    Renewed inflationary worries and rising inflation expectations pushed gold to $1,865 in mid-November. However, the Fed announced a tapering of its asset purchases, calming markets once again and regaining investors’ trust in its ability to control inflation. As consequence, gold declined below $1,800 once again and stayed there by the end of the year.

    What can we learn from gold’s performance in 2021? First of all, gold is not a perfect inflation hedge, as the chart below shows. I mean here that, yes, gold is sensitive to rising inflation, but a hawkish Fed beats inflation in the gold market. Thus, inflation is positive for gold only if the US central bank stays behind the curve. However, when investors believe that either inflation is temporary or that the Fed will turn more hawkish in response to upward price pressure, gold runs away into the corner. Royal metal, huh?

    Second, never underestimate the power of the dark… I mean, the hawkish side of the Fed – or simply, don’t fight the Fed. It turned out that the prospects of a very gradual asset tapering and tightening cycle were enough to intimidate gold.

    Third, real interest rates remain the key driver for gold prices. As one can see in the chart below, gold plunged each time bond yields rallied, in particular in February 2021, but also in June or November. Hence, gold positively reacts to inflation as long as inflation translates into lower real interest rates. However, if other factors – such as expectations of a more hawkish Fed – come into play and outweigh inflation, gold suffers.

    Great, we already know that 2021 sucked and why. However, will 2022 be better for the gold market? Although I have great sympathy for the gold bulls, I don’t have good news for them.

    It seems that gold’s struggle will continue this year, at least in the first months of 2022, as the Fed’s hiking cycle and rising bond yields would create downward pressure on gold. However, when the US central bank starts raising the federal funds rate, gold may find its bottom, as it did in December 2015, and begin to rally again.

    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, 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: 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.

  • Excuse Me, Mr. Gold. What Year Is It?

    December 31, 2021, 7:34 AM

    Although your calendar may say otherwise, gold is in the 1960s. The question is whether we will move into the 1970s or speed-run to the mid-2010s.

    Did you go overboard with your time travel and lose track of time? Probably not, but just in case, I assure you that the current year is 2021. To be 100% sure, I fact-checked it on a dedicated webpage for time-travelers. However, the authority of science is being questioned, and there are people who say that, from a macroeconomic point of view, we are approaching the 1970s, or at least the 1960s. There are also voices saying that the gold market is replaying 2012-2013. Although appearances point to 2021, let’s investigate what year we really live in.

    The similarities with the 1970s are obvious. Just like then, we have high inflation, large fiscal deficits (see the chart below), and easy, erroneous monetary policy. Fifty years ago, the Fed blamed inflation on exogenous shocks and considered inflation to be transitory too. The new monetary regime adopted by the US central bank in 2020 also takes us back to the 70s and the mistaken belief that the economy cannot overheat, so the Fed can let inflation run above the target for a while in order to boost employment.

    The parallels extend beyond price pressure. The withdrawal of US troops from Afghanistan reminded many of the fall of Saigon. The world is facing an energy crisis right now, another feature of the 1970s. If we really repeat those years, gold bulls should be happy, as the yellow metal rallied from $35 to $850, surging more than 2300% back in that decade (see the chart below).

    However, there is one problem with this narrative. In the 1970s, we experienced stagflation, i.e., a simultaneous occurrence of high inflation and economic stagnation with a rising unemployment rate. Currently, although we face strong upward price pressure, we enjoy economic expansion and declining unemployment, as the chart below shows. Indeed, the monthly unemployment rate decreased from 14.8% in April 2020 to 4.2% in November 2021.

    The current macroeconomic situation, characterized by inflation without stagnation part, is reminiscent of the 1960s, a decade marked by rising inflation and rapid GDP growth. As the chart below shows, the CPI annual rate reached a local maximum of 6.4% in February 1970, similar to the current inflation level.

    Apparently, we are replaying the 1960s right now rather than the 1970s. So far, growth is slowing down, but we are far from stagnation territory. There is no discussion on this. My point was always that the Fed’s actions could bring us to the 1970s, or that complacency about inflation is increasing the risk of de-anchoring inflation expectations and the materialization of a stagflationary scenario. In the 1960s, the price of gold was still fixed, so historical analysis is impossible.

    However, it seems that gold won’t start to rally until we see some signs of stagnation or an economic crisis, and markets begin to worry about recession. Given that the current economic expansion looks intact, the yellow metal is likely to struggle at least by mid-2022 (unless supply disruptions and energy crisis intensify significantly, wreaking havoc).

    Do we have to go back that far in time, though? Maybe the 2020 peak in gold prices was like the 2011 peak and we are now somewhere in 2012-2013, on the eve of a great downward move in the gold market? Some similarities cannot be denied: the economy is recovering from a recession, while the Fed is tightening its monetary policy, and gold shows weakness with its inability to surpass $1,800. So, some concerns are warranted. I pointed out a long time ago the threat of an upward move in the real interest rates (as they are at record low levels), which could sink the precious metals market.

    However, there are two key differences compared to the 2012-2013 period. First, inflation is much higher and it’s still accelerating, while ten years ago there was disinflation. This distinction should support gold prices. The peak in the inflation rate could be a dangerous time for gold, as the disinflationary era would raise interest rates, putting downward pressure on the yellow metal.

    Second, the prospects of the Fed’s tightening cycle are probably already priced in. In other words, the next “taper tantrum” is not likely to happen. It implies that a sudden spike in the interest rates similar to that of 2013 (see the chart below) shouldn’t repeat now.

    Hence, the answer to the question “what year is it?” should be that we are somewhere in the 1960s and we can move later into the 1970s if high inflation stays with us and stagnation sets in or if the next crisis hits. However, we can leap right into the 2010s if inflation peaks soon and the hawkish Fed triggers a jump in bond yields. It’s also possible that we will see a temporary disinflation before the second wave of elevated inflation. So, gold could continue its struggle for a while before we see another rally.

    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, 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: 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 the End of Transitory Inflation the End of Gold Bulls?

    December 24, 2021, 4:53 AM

    The debate about the nature of inflation is over. Now the question is what the end of transitory inflation implies for gold. I offer two perspectives.

    Welcome, my son. Welcome to the inflationary machine. Welcome to the new economic regime of elevated inflation. That’s official because even central bankers have finally admitted what I’ve been saying for a long time: the current high inflation is not merely a transitory one-off price shock. In a testimony before Congress, Jerome Powell agreed that “it’s probably a good time to retire” the word “transitory” in relation to inflation. Bravo, Jay! It took you only several months longer than my freshmen students to figure it out, but better late than never. Actually, even a moderately intelligent chimpanzee would notice that inflation is not merely temporary just by looking at the graph below.

    To be clear, I’m not predicting hyperinflation or even galloping inflation. Nor do I claim that at least some of the current inflationary pressures won’t subside next year. No, some supply-side factors behind recent price surges are likely to abate in 2022. However, other drivers will persist, or even intensify (think about housing inflation or energy crisis).

    Let’s be honest: we are facing a global inflation shock right now. In many countries, inflation has reached its highest rate in decades. In the United States, the annual CPI rate is 6.2%, while it reached 5.2% in Germany, 4.9% in the Eurozone, and 3.8% in the United Kingdom. The shameful secret is that central banks and governments played a key role in fueling this inflation. As the famous Austrian economist Ludwig von Mises noticed once,

    The most important thing to remember is that inflation is not an act of God; inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy — a deliberate policy of people who resort to inflation because they consider it to be a lesser evil than unemployment. But the fact is that, in the not very long run, inflation does not cure unemployment.

    Indeed, the Fed and the banking system injected a lot of money into the economy and also created room for the government to boost its spending and send checks to Americans. The resulting consumer spending boom clogged the supply chains and caused a jump in inflation.

    Obviously, the policymakers don’t want to admit their guilt and that they have anything to do with inflation. At the beginning, they claim that there is no inflation at all. Next, they say that inflation may exist after all, but is only caused by the “base effect”, so it will be a short-lived phenomenon that results solely from the nature of the yearly comparison. Lastly, they admit that there is something beyond the “base effect” but inflation will be transitory because it’s caused only by a few exceptional components of the overall index, the outliers like used cars this year. Nothing to worry about, then. Higher prices are a result of bottlenecks that will abate very soon on their own. Later, inflation is admitted to be more broad-based and persistent, but it is said to be caused by greedy businesses and speculators who raise prices maliciously. Finally, the policymakers present themselves as the salvation from the inflation problem(that was caused by them in the first place). Such brilliant “solutions” as subsidies to consumers and price controls are introduced and further disrupt the economy.

    The Fed has recently admitted that inflation is not merely transitory, so if the abovementioned scheme is adequate, we should expect to look for scapegoats and possibly also interventions in the economy to heroically fight inflation. Gold could benefit from such rhetoric, as it could increase demand for safe-haven assets and inflation hedges.

    However, the Fed’s capitulation also implies a hawkish shift. If inflation is more persistent, the US central bank will have to act in a more decisive way, as inflation won’t subside on its own. The faster pace of quantitative easing tapering and the sooner interest rate hikes imply higher bond yields and a stronger greenback, so they are clearly negative for gold prices.

    Having said that, the Fed stays and is likely to stay woefully behind the curve. The real federal funds rate (i.e., adjusted by the CPI annual rate) is currently at -6.1%, which is the deepest level in history, as the chart below shows. It is much deeper than it was at the lows of stagflation in the 1970s, which may create certain problems in the future.

    What is important here is that even when the Fed raises the federal funds rate by one percentage point next year, and even when inflation declines by another two percentage points, the real federal funds rate will increase to only -3%, so it will stay deeply in negative territory. Surely, the upward direction should be negative for gold prices, and the bottom in real interest rates would be a strong bearish signal for gold. However, rates remaining well below zero should provide some support or at least a decent floor for gold prices (i.e., higher than the levels touched by gold in the mid-2010s).

    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, 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: 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.

  • Not Only Gold Lacks Energy – We All Do Now

    December 17, 2021, 8:53 AM

    First a pandemic, then inflation, and now an energy crisis. Should you buy gold when preparing for the winter?

    Brace yourselves, winter is coming! And this time I’m deadly serious, as there is a global energy crisis. Not only does gold lack energy to fuel its rally right now, but people from all over the world lack it to fuel their operations and to heat their houses. Apparently, the coronavirus pandemic wasn’t enough, so we also have to deal with inflation, supply bottlenecks, and the energy crisis. I guess there is nothing else to do now but wait for the frogs to start falling from the sky.

    But let’s not give the gods ideas and focus on the energy crisis today. What is it about? A picture is worth a thousand words, so please take a look at the chart below, which presents the Dutch Title Transfer Facility, Europe’s leading benchmark for natural gas prices. As you can see, future prices for European natural gas have skyrocketed to a record level in October 2021, surging several times from their low in May 2020. The persistence and global dimension of these price spikes are unprecedented, as natural gas prices have also surged in Asia and America (although to a lesser degree).

    Chart, line chartDescription automatically generated

    What caused such a spike? Well, as a trained economist, I cannot resist answering that it’s a matter of demand and supply! Yeah, thank you, Captain Obvious, but could you be a little more specific? Sure, so on the demand side, we have to mention a fast recovery from the epidemic and cold fall that increased the use of energy. Oh, and don’t forget about the ultra-low interest rates and the increase in the money supply that boosted spending on practically everything. The increased demand for energy is hardly surprising in such conditions.

    On the supply side, there were unpredictable breakdowns of gas infrastructure in Russia and Norway that decreased deliveries. The former country reduced its exports due to political reasons. What’s more, the reduction in the supply of CO2 emission rights and unfavorable weather didn’t help. The windless conditions in Europe generated little wind energy, while drought in Brazil reduced hydropower energy.

    More fundamentally, the decline in energy prices in response to the economic crisis of 2020 prompted many producers to stop drilling and later supply simply didn’t catch up with surging demand. You can also add here the political decisions to move away from nuclear and carbon energy in some countries.

    Last but not least, the butterfly’s wings flapped in China. Coal production in that country plunged this year amid a campaign against corruption and floods that deluged some mines. Middle Kingdom therefore began to buy significant amounts of natural gas, sharply increasing its prices. China’s ban on importing coal from Australia, of course, didn’t help here.

    Great, but what does the energy crisis imply for the global economy and the gold market? First, shortages of energy could be a drag on global GDP. The slowdown in economic growth should be positive for gold, as it would bring us closer to stagflation. Second, the energy crisis could cause discontent among citizens and strengthen the populists. People are already fed up with pandemics and high inflation, and now they have to pay much higher energy bills. Just imagine how they will cheer when blackouts occur.

    Third, the surge in natural gas prices could support high producer and consumer inflation. We are already observing some ripple effects in the coal and oil markets that could also translate into elevated CPI numbers. Another inflationary factor is power shortages in China, as they will add to the supply disruptions we are currently facing. All this implies more persistent high inflation, which should provide support for the yellow metal as an inflation hedge, although it also increases the odds of a more hawkish Fed, which is rather negative for gold.

    It’s true that a replay of the 1970s-like energy crisis is remote, as today’s economies are much less energy-consuming and dependent on fossil fuels. However, the worst is possibly yet to come. After all, winter hasn’t arrived yet – and it could be another harsh one, especially given that La Niña is expected to be present for the second year in a row. Meanwhile, gas stocks are unusually low. You can connect the dots.

    So far, gold has rather ignored the unfolding energy crisis, but we’ve already seen that market narratives can change quickly. It’s therefore possible that prolonged supply disruption and high inflation could change investors’ attitude toward the yellow metal at some point. The weak gold’s reaction stems from the limited energy crisis in the US and from the focus on the Fed’s tightening cycle. But investors’ attention can shift, especially when the Fed starts hiking federal funds rate. Brace yourselves!

    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, 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: 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.

  • Another 4 Years of Gold’s Tricky Romance With Jay

    December 10, 2021, 10:16 AM

    “Do you love me?”, asked gold. “Of course, my dear”, replied Jay, but his thoughts were with others: asset purchases tapering and interest rate hikes.

    “It’s complicated” – this is how many people answer questions about their romantic lives. The relationship between gold and Jerome Powell is also not a clear one. As you know, in November, President Biden announced that he would reappoint Powell for the second term as the Fed Chair. It means that gold will have to live with Jerome under the same roof for another four years.

    To say that gold didn’t like it is to say nothing. The yellow metal snapped and left the cozy living room of $1,850, slamming the door loudly. In less literary expressions, its price plunged from above $1,860 on November 19 to $1,782 on November 24, 2021, as the chart below shows.

    The impulsive gold’s reaction to Powell’s renomination resulted from its failed dream about a love affair with Lael Brainard. She was considered a leading contender to replace Powell. The contender that would be more dovish and, thus, more supportive of gold prices.

    However, is a hawkish dove a hawk? Is Powell really a hawk? Even if more hawkish than Brainard, he still orchestrated an unprecedentedly accommodative monetary policy in response to the pandemic-related economic crisis. It was none other than Powell who started to cut interest rates in 2019, a year before the epidemic outbreak. It was he who implemented an inflation-averaging regime that allowed inflation to run above the target. Right now, it’s also Powell who claims that the current high inflation is transitory, although it’s clear for almost everyone else that it’s more persistent. I wouldn’t call Powell a hawk then. He is rather a dove in a hawk’s clothing.

    So, gold doesn’t have to suffer under Powell’s second term as the Fed Chair. Please take a look at the chart below, which shows gold’s performance in the period of 2017-2021. As you can see, the yellow metal gained about 34% during Powell’s first term as the chair of the Federal Reserve that started in February 2018 (or 40% since Trump’s November 2017 nomination of the Fed).

    Not bad! Actually, gold performed much better back then than under Yellen’s term as the Fed Chair. During her tenure, which took place in 2014-2018, the yellow metal was traded sideways, remaining generally in a corridor between $1,100-$1,300.

    I’m not saying that Yellen despised gold, while Powell loves it. My point is that gold’s performance during the tenures of Fed Chairs varies along with changes in the macroeconomic environment in which they act and the monetary stance they adopt. Gold suffered strongly until December 2015, when Yellen finally started hiking the federal funds rate. It then rebounded, only to struggle again in 2018 amid an aggressive tightening cycle. However, at the end of that year it started to rally due to a dovish shift within the Fed, and, of course, in a lagged response to unprecedented fiscal and monetary actions later in 2020.

    I have bad and good news here. The former is that the macroeconomic environment during Powell’s second term could be more inflationary, demanding more hawkish actions. The Fed has already started tapering of its quantitative easing, and bets are accumulating that it could start hiking interest rates somewhere around mid-2022. What’s more, the continuation of Powell’s leadership ensures more stability and provides markets with more certainty about what to expect from the Fed in the coming years. This is bad news for safe-haven assets such as gold.

    Last but not least, the composition of the FOMC is going to shift toward the hawkish side. This is because some strong doves, such as Daly and Evans, are out, while some notable hawks, such as George, Mester (and also Bullard), are among the voting members in 2022. Gold may, therefore, find itself under downward pressure next year, especially in its first half.

    On the other hand, the current FOMC expresses clearly dovish bias. With mammoth public debt and elevated asset prices, aggressive tightening would simply be very risky from a financial and political point of view. So, the Fed is likely to generally remain behind the curve. By the way, Biden not only reappointed Powell for the second term as Fed Chair, but he also appointed Brainard as Vice-Chair. We also can’t exclude that Biden agreed to Powell’s second term only if he conducts “appropriate” monetary policy.

    Democratic Senator Elizabeth Warren once called Powell “a dangerous man.” Well, in a way, it’s true, as powerful people can be dangerous. However, history shows that Powell doesn’t have to be a threat to gold. After all, he is not a hawk in the mold of Paul Volcker, but merely a hawkish dove, or a dove that will have to normalize the crisis monetary policy and curb inflation.

    In the upcoming months, gold may struggle amid prospects of more interest rates hikes and likely strengthened hawkish rhetoric from the Fed. However, precious metals investors often sell the rumor and buy the fact. So, when the US central bank finally delivers them, better times may come for the yellow metal, and gold and Jay could live happily ever after. The 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, 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: 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.

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