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Fundamental Gold Report

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Gold report that enables you to quickly respond to the latest fundamental changes on the gold market. Posted bi-weekly, the Fundamental Gold Reports by Arkadiusz Sieroń, PhD will make sure that you stay up-to-date with the latest fundamental buzz. For all gold investors, who want to know the “why” behind gold’s price swings, our gold reports are a must-have.

  • Gold Approaches $1,700 on Rising Economic Confidence

    March 4, 2021, 10:15 AM

    Gold remains in a bearish trend as economic confidence has improved, however, inflation can change all that around.

    The chart presenting gold prices in 2021 doesn’t look too encouraging. The yellow metal continued its bearish trend at the turn of February and March. So, as one can see, the price of gold has declined from $1,943 on January 4 to $1,711 on Wednesday (Mar. 3) This means a drop of 232 bucks, or 12 percent since the beginning of the year.

    What is happening in the gold market? I would like to blame the jittering bond market and increasing bond yields, but the uncomfortable truth is that the yellow metal has slid in the past few days despite the downward correction in the bond yields. If you don’t believe, take a look at the chart below. This is an important bearish signal, given how closely gold is usually linked to the real interest rates.

    So, it seems that there are more factors at work than just the bond yields. One of them is the recent modest strengthening of the greenback, probably amid rising U.S. interest rates and ECB officials’ remarks about possible expansion of the ECB’s accommodative stance if the selloff in the bond market continues.

    Another piece of bearish news for the gold market is that President Joe Biden struck a last-minute stimulus deal with Democratic Senators that narrows the income eligibility for the next round of $1,400 stimulus checks. It means that the upcoming fiscal stimulus will be lower than previously expected, negatively affecting inflation expectations and, thus, the demand for gold as an inflation hedge.

    Lastly, I have to mention the high level of confidence in the economy. Indeed, the recent rise in the bond yields may just be a sign of more optimism about the economic recovery from the pandemic recession. Hence, despite all the economic problems the U.S. will have to face – mainly the huge indebtedness or actually the debt-trap – investors have decided to not pay too much attention to the elephants in the room. As the chart below shows, the credit spread (ICE BofA US High Yield Index Option-Adjusted Spread), which is a useful measure of economic confidence, has returned to the pre-pandemic level, indicating a strong belief in the state of the economy. This is, of course, bad for safe-haven assets such as gold.

    Implications for Gold

    What does this all mean for gold prices? Well, from the long-term perspective, the recent slide to almost $1,700 could just be noise in the marketplace. But gold’s disappointing performance is really disturbing given the seemingly perfect environment for the precious metals. After all, we live in a world of negative interest rates, a weak U.S. dollar, rising fiscal deficits and public debt, soaring money supply and unprecedented dovish monetary and fiscal policies. So, the bearish trend may be more lasting, as market sentiment is still negative. Investors usually turn to gold, a great portfolio diversifier and a safe haven, when other investment are falling. But the worst is already behind us, the economy has already bottomed out, so confidence in the economy is now high, and equities are rising.

    Having said that, the recent jump in the bond yields also means rising inflation expectations. Indeed, as the chart below shows, they have already surpassed the levels seen before the outbreak of the pandemic.

    Actually, the 5-year breakeven inflation rate has reached 2.45 percent, the highest level since the midst of the Great Recession. So, in some part, investors are selling bonds, as they are preparing for an reflation environment marked by higher inflation. At some point, if the fear of inflation strengthens, then economic confidence will waver, and investors could again turn toward gold.

    If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

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

    -----

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

  • Gold Continues Declines on Bond Yield Jitters

    March 2, 2021, 10:09 AM

    The economy seems to be recovering, while bond yields are increasing again, sending gold prices down.

    Not good. Gold bulls can be truly upset. The yellow metal continued its bearish trend last week. As the chart below shows, the price of gold has declined from $1,807 on Monday (Feb. 22) to $1,743 on Friday (Feb. 26).

    What happened? Well, last week was full of positive economic news. In particular, personal income surged by 10 percent in January, compared to only 0.6-percent rise in the previous month. Meanwhile, consumer spending increased 2.4 percent, following a 0.4-percent decline in December. This means that, on an absolute basis, personal consumption expenditures have almost returned to the pre-pandemic level, as the chart below shows.

    Additionally, durable goods orders jumped by 3.4 percent in January versus a 1.2-percent increase one month earlier. Moreover, initial jobless claims declined from 841,000 to 730,000 in the week ending February 20, as the chart below shows. It means that the economic situation is improving, partially thanks to the December fiscal stimulus.

    And, on Saturday (Feb. 27), the House of Representatives passed Biden’s $1.9 trillion stimulus package. Although the bill has yet to be approved by the Senate, the move by the House brings us one step closer to its implementation. Although the additional fiscal stimulus may overheat the economy and turn out to be positive for gold prices in the long-term, the strengthened prospects of higher government expenditures can revive the optimism in the financial markets, negatively affecting the safe-haven assets such as gold.

    Finally, on Saturday, the FDA authorized Johnson & Johnson’s vaccine against COVID-19. This decision expands the availability of vaccines, which brings us closer to the end of the epidemic in the U.S. and offers hope for a faster economic recovery. The new vaccine is highly effective (it provides 85-percent protection against severe COVID-19 28 days after vaccination) and most importantly, requires only one dose, which facilitates efficient distribution. So, the approval of another vaccine is rather bad news for gold and could add to the metal’s problems in the near future.

    However, the most important development from the last week was the jump in the bond yields. As the chart below shows, after a short stabilization in the first half of the week, the yields on the 10-year Treasuries indexed by inflation rose from -0.79 to -0.60 percent on Thursday (Feb. 25). This surge in the real interest rates is negative for the price of gold.

    Implications for Gold

    What does this all mean for the price of gold? Well, the increase in the bond yields is clearly bad for the yellow metal. Although they have partially risen to strengthened inflation expectations, the real interest rates have also soared. It means that investors expect wider fiscal deficits and expanding vaccination to accelerate inflation only partially, but in a large part, it will speed up real economic growth. This is a huge problem for gold, as real interest rates are a key driver of gold prices.

    An additional issue is that the expectations of higher economic growth and inflation create accompanying expectations for the Fed to tighten its monetary policy and hike the federal funds rate, which exerts downward pressure on gold prices.
    This is what we were afraid of at the beginning of the year. We noted that the real interest rates were so low that the next move could be up. Importantly, there is further room for upward trajectory, as the real interest rates are still importantly below the pre-pandemic level.

    However, we wouldn’t bet on the return to the levels seen last year. After all, interest rates didn’t return to the pre-crisis level after the Great Recession, so it’s unlikely that they will do it now. Additionally, investors should remember that the U.S. government is now so heavily indebted that if Treasury yields continue to increase, the Fed would have to intervene. A failure to do so would mean that the interest expenses would grow too much, creating serious problems for the Treasury. So, the current bearish trend in gold may not last forever – although it may still take some time.

    If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

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

    -----

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

  • Gold Declines Despite Powell’s Easy Stance

    February 25, 2021, 11:09 AM

    Powell testified before Congress and reiterated the Fed’s dovish stance, but nevertheless, gold continued to slide.

    On Tuesday, Powell testified before the United States Senate Committee on Banking, Housing, and Urban Affairs. He offered no big surprises, so the markets were little changed. But the price of gold ended that day with a slight loss, as the chart below shows – perhaps just because Powell didn’t surprise, and struck a dovish tone.

    Anyway, what did the Fed Chair say? In his prepared remarks, Powell acknowledged the improved outlook for later this year. As I noted in the last edition of the Fundamental Gold Report about the recent FOMC minutes, a more optimistic Fed about the U.S. economy is bad news for gold.

    Additionally, Powell downplayed concerns about the recent rises in the bond yields (see the chart below), calling them “a statement of confidence” for an improving U.S. economic outlook, or “a robust and ultimately complete recovery”. This is also a negative comment for the yellow metal, as it would prefer the Fed reacting more aggressively to the increasing rates, and, for instance, implementing the yield curve control. The higher the yields, the worse it is for gold, which is a non-interest bearing asset.

    However, Powell also made some dovish comments. First of all, he reiterated that the Fed’s easy stance will last very long – longer than it used to be in the past. This is because the Fed implemented last year a new monetary framework, according to which the U.S. monetary policy will be informed by the assessments of shortfalls of employment from its maximum level, rather than by deviations from its maximum level. Moreover, the Fed will seek to achieve inflation that averages two percent over time. These changes imply that the Fed will not tighten monetary policy solely in response to a strong labor market, but only to an increase in inflation. However,But inflation must not merely reach two percent – it should rise moderately above two percent for some time in order to prompt the U.S. central bank to taper the quantitative easing and hike the federal funds rate.

    The second reason why the interest rates will stay lower for longer is that the economy is a long way from the Fed’s employment and inflation goals, and “it is likely to take some time for substantial further progress to be achieved”. On Wednesday, Powell acknowledged that it may take more than three years to reach these goals. This means that the Fed will treat any possible increases in inflation this year as temporary and will leave interest rates unchanged.

    Implications for Gold

    What does Powell’s testimony imply for the gold market? Well, gold bulls may be disappointed as the Fed Chair didn’t sound too dovish. He neither announced an expansion in the quantitative easing, nor the yield curve control, nor negative interest rates, nor a “whatever it takes” approach. And it seems that the yellow metal needs such things right now in order to survive – just like fish need water.

    However, the rising bond yields could become a problem at one point for the Fed. If they continue to rise, Uncle Sam will not be happy, and the Fed will have to step into the market to buy government bonds. The central bank and Treasury are good old friends and the close relationship between Powell and Yellen may only strengthen this beautiful friendship – and support gold prices.

    Moreover, the increasing bond yields (despite an ultra-dovish Fed) imply that reflation trade is strong. So far, investors just expect a return of inflation to a moderate level, but given the enormous surge in the broad money supply (see the chart below) and Biden’s mammoth fiscal plan, the risk of overheating is non-negligible.

    It would be really strange if such an aggressive monetary expansion wouldn’t affect the prices. As one can see, the growth in the M2 money supply is 2.5 times faster than during the Great Recession. Actually, we are already seeing inflation – but in the asset markets, not the CPI. The stock and house prices are surging. The commodity sector has also already been gaining and gold may follow suit.

    If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

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

    -----

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

  • FOMC Minutes Disappoint Gold Bulls

    February 22, 2021, 11:01 AM

    The recent FOMC minutes are hawkish and negative for the price of gold, but the Fed will remain generally dovish for some time.

    Last week, the Federal Open Market Committee (FOMC) published minutes from its last meeting in January. They reveal that Fed officials became more optimistic about the economy than they were in December. The main reasons behind the more upbeat economic projection were the progress in vaccinations, the government’s stimulus provided by the Consolidated Appropriations Act 2021, and the expectations of an additional sizable tranche of fiscal support in the pipeline:

    Most participants expected that the stimulus provided by the passage of the CAA in December, the likelihood of additional fiscal support, and anticipated continued progress in vaccinations would lead to a sizable boost in economic activity.

    The Committee members were so convinced that the longer-run prospects for the economy had improved, that they decided to skip reference to the risks to the outlook in their official communications:

    in light of the expected progress on vaccinations and the change in the outlook for fiscal policy, the medium-term prospects for the economy had improved enough that members decided that the reference in previous post-meeting statements to risks to the economic outlook over the medium term was no longer warranted.

    Hence, the recent minutes are generally hawkish and bad for gold. They show that the FOMC participants turned out to be more optimistic about the U.S. economy over the medium-term, as they started to expect “strong growth in employment, driven by continued progress on vaccinations and an associated rebound of economic activity and of consumer and business confidence, as well as accommodative fiscal and monetary policy.”

    And, although they acknowledged that inflation may rise somewhat in 2021, the Fed officials generally were not concerned about strong upward pressure, with “most” participants still believing that inflation risks were weighted to the downside rather to the upside. In other words, they expect more growth than inflation.

    Implications for Gold

    The Fed officials that have become more optimistic about the economy are proving negative for gold prices. Gold shines most when the Fed is pessimistic about GDP growth and the labor market, as these two factors are more prone to loosen the Fed’s monetary policy. In other words, gold prices need more inflation than economic growth in order to grow. Alternatively, gold needs the Fed to do something and expand its monetary accommodation.

    Indeed, the last week hasn’t been good for the price of the yellow metal. As the chart below shows, it declined below $1,800 to $1,773 on Thursday (Feb. 18), the lowest level since November 2020.

    Of course, the decline in the gold prices was more related to the significant selloff in the U.S. bond market than to the FOMC minutes. The bond yields increased sharply. For instance, the 10-year TIPS yields rose from -1.06 on February 10 to -0.87 on February 18, 2021, as one can see in the chart below.

    However, both events clearly show elevated expectations about the medium-term economic growth. Both investors and central bankers have become more optimistic about the future amid progress in vaccinations and greater prospects for additional fiscal stimulus. The strengthened risk appetite has supported equity prices, making some investors head for the exits in the gold market.

    Having said that, although gold prices still have some room to go lower – especially if real interest rates rally further – the fundamentals are still positive. I’m referring here to the fact that the U.S. economy has fallen into the debt trap. Both private and public debt is enormous. In such an environment, the interest rates cannot significantly increase, as they would pose a great risk to an overvalued equity market and Treasury. So, the Fed wouldn’t allow for really high interest rates and would intervene, either through expanding its quantitative easing program or through capping the yield curve.

    Another issue is that the Fed is not going to change its dovish monetary policy anytime soon. Even in the recent, relatively upbeat minutes, Fed officials acknowledged that economic conditions were far from the central banks’ targets:

    Participants observed that the economy was far from achieving the Committee’s broad-based and inclusive goal of maximum employment and that even with a brisk pace of improvement in the labor market, achieving this goal would take some time (…) Participants noted that economic conditions were currently far from the Committee’s longer-run goals and that the stance for policy would need to remain accommodative until those goals were achieved.

    Moreover, the Fed’s staff assessed the financial vulnerabilities of the U.S. financial system as being notable. The asset valuation pressures are elevated, and vulnerabilities associated with business and household debt increased over the course of 2020, from levels that were already elevated before the outbreak of the pandemic. So, given all these fragilities, it is unlikely that we will see a really hawkish Fed or significantly higher interest rates. There is also a possibility of the next financial crisis, given the high debt levels. All these factors should support gold prices in the long-term, although more declines in the short-term are possible of course, due to the more positive sentiment among investors and rising bond yields.

    If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

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

    -----

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

  • Silver Will Outperform Gold, Says LBMA Survey

    February 16, 2021, 10:00 AM

    Gains are in the forecast for all the precious metals this year, and silver is believed to be the star of the show.

    The London Bullion Market Association (LBMA) has just published its annual precious metals forecast survey. In general, the report is bullish, as the analysts expect significant gains in all the precious metals against 2020 average prices. However, the experts see only modest increases from mid-January levels.

    In particular, the analysts’ 2021 average forecast for the price of gold is $1,973.8. It implies a 11.5-percent jump relative to the 2020 average (broadly in line with last year), but just a 4.6-percent increase compared to the price in the first half of January 2021.

    Silver is expected to be the best performing precious metal this year. Its average price is expected to be $28.5 in 2021, or 38.7 percent higher than last year, and 8.1 percent up from the mid-January. The forecast for all metals is presented in the table below.

    Picture showing diagrams

    Among the important drivers of the performance of the precious metals prices this year are geopolitical factors, the impact of the COVID-19 pandemic, and the pace of economic recovery. However, in line with my own understanding of the gold market, the top three drivers for the gold price pointed out by the analysts are more related to the macroeconomic factors: negative or falling interest rates, a weaker U.S. dollar, and U.S. fiscal and monetary policies.

    Of course, the above numbers are the averages of more than 30 forecasts from different analysts. The most bearish expert sees the average price of gold as low as $1.650, while the most bullish participant at $2,300. Also interesting is the wide high/low range of $1,192 ($2.680 as the highest high and $1,488 as the lowest low) compared to $780 last year. So, it could shape itself to be a volatile year!

    Given my fundamental outlook, I include myself in the camp of cautious bulls. Why cautious? Well, the current bearish/sideways trend is disturbing – especially when compared to Bitcoin – and there are important downside risks. In particular, with the ongoing economic recovery, the risk appetite could strengthen, and the real interest rates could increase, given their already ultra-low levels. The bond yields could rise especially if investors start to expect the Fed’s tapering of quantitative easing. So, we could indeed see heightened volatility and I wouldn’t be surprised if the gains in 2021 turn out to be smaller than last year.

    However, there are also significant bullish arguments that investors shouldn’t neglect. As William Adams points out in the LBMA survey, “There are numerous factors supporting the view that we have entered another commodity super-cycle and, if that is the case, gold is likely to run higher too”. Furthermore, and what I have emphasized for a long time, in the aftermath of this recession, the central banks and governments pumped liquidity “not just into the financial markets but at the household/retail level too, which might be more likely to be inflationary”. Indeed, this time not only the monetary base has increased, but the broad money supply too.

    In addition, the public debt has increased massively and it’s going to balloon even further this year. Thus, investors may get worried about the high indebtedness and the increased likelihood of the debt crisis and buy more gold as a safe haven. Given the lavish fiscal policy, the Fed will remain very dovish, while the real interest rates will stay well in the negative territory, supporting gold prices. Indeed, the yields on almost 30 percent of the world’s investment-grade debt are now below zero, which should strengthen gold’s appeal as a portfolio diversifier. Actually, if inflation expectations pick up (partially due to rising oil prices), the real yields could decline again, supporting gold prices.

    Implications for Gold

    What does the LBMA annual forecast survey predict for the yellow metal? The report is bullish, as participants expect double-digit price gains this year compared to 2020. However, they see only modest increases from the first half of January 2021. They also provide many reasonable arguments why gold could have trouble duplicating the bullish performance of the last year (especially if higher inflation doesn’t materialize), which is actually in line with my own cautious view. Hence, I agree with Ross Norman, the winner of LBMA’s 2020 Precious Metals Forecast Survey, who says that “we expect gold to perform well in 2021, although at a slightly more subdued rate compared to 2020”.

    Interestingly, while most analysts are cautiously optimistic about gold, they are much more upbeat on silver, believing that it will outperform the yellow metal in 2021. Although it seems that the short squeeze in the silver market attempted by Reddit investors has failed, there is no doubt that the poor man’s gold started 2021 better than the yellow metal. Will this trend continue? Only time will tell!

    If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

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

    -----

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

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