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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.

  • With Fresh Fiscal Stimulus, Will Gold Rally?

    December 29, 2020, 1:17 PM

    The new fiscal package bill has been passed, but gold remains below $1,900.

    I hope that you enjoyed the holidays, despite the COVID-19 related restrictions! On December 27, President Trump signed off on the fresh fiscal stimulus that the U.S. Congress agreed upon just before Christmas. The bill averts a government shutdown, funding its expenditures. Importantly, it includes $900 billion of economic aid allocated to small businesses and unemployed Americans. It will also transfer billions of dollars to schools and pay for further vaccine distribution. Moreover, the bill will fund automatic, direct payments of up to $600 per adult.

    The announcement was positive for U.S. equities. After all, the relief bill marked the end of a months-long stalemate in Washington over the shape of the new aid package, and the signing of a long-awaited bill increased optimism for an economic recovery. Indeed, the stimulus package will increase the disposable income of Americans.

    However, the bill does not include any new federal aid for state and local governments or liability protections for businesses. And, more generally, the government can’t create a sustainable recovery simply by injecting more cash into the economy. Printing and borrowing money does not magically solve structural and underlying economic problems. In November, both consumer spending and personal income declined on waning fiscal support, thus showing that the government’s fiscal support just covers the big holes in the economy.

    Another important issue is that the pandemic is still out of control in the U.S. Although we could already be past the peak in the daily number of new cases, there are still more than 150,000 new infections each day, as the chart below shows. Some epidemiologists even warn against a ‘dark winter’ and believe that the human toll will reach a record high in January.

    However, later can only get better. After all, vaccinations have begun and they’re progressing. As one can see in the chart below, about 2.13 million doses have already been administered in the U.S. thus far, but that number should significantly accelerate in 2021.

    Implications for Gold

    What does this all imply for the price of gold? Well, the signing of the fresh economic relief bill was positive for the yellow metal. The price of gold even touched $1,900, but it failed again at this level, declining to $1,870-1,880 on Monday (Dec. 28).

    According to some economists, the bill came too late. So, although the bill could have stimulative effect, the U.S. economy will not escape the slowdown in the first quarter of 2021. And this positive effect could be only temporary and at the expense of much higher fiscal deficits and public debt. Moreover, the Biden administration and Democrats in Congress would call for another fiscal package next year! The continuation of loose fiscal policy (and monetary policy as well) should support the price of gold in 2021, just as it did this year. As a reminder, due to the pandemic, the U.S. debt has ballooned this year to around $27.5 trillion, while the global debt spiralled to around $277 trillion.

    To be clear, I don’t see a reversal either in the Fed’s stance, or Congress’s approach. However, in December the Fed showed reluctance to expand its quantitative easing, while Republicans – if they remain control over the Senate – will block expansionary fiscal policies. So, gold could get less support from this side. Moreover, the risk appetite should be stronger next year, as compared to 2020.

    Luckily, a weaker greenback, soaring indebtedness with concerns about the debt crisis, and risk of higher inflation could be important tailwinds in 2021. I will write more about my view on the gold market in 2021 in the next issue of the Fundamental Gold Report and Gold Market Overview. Stay tuned!

    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.

  • With Dovish Powell, Can Gold Shine Again?

    December 22, 2020, 6:50 AM

    Fed Chair Jerome Powell sounded dovish during his press conference on December 16, where he gave a market update after the Fed’s monetary policy meeting. The Fed will remain accommodative for a long time, which should support gold prices.

    Last week was full of important events. First, both the Pfizer/BioNTech and Moderna vaccines received emergency-use authorization from the U.S. Food and Drug Administration. In consequence, the first COVID-19 vaccination in the United States has already taken place, which is great news for America, as it marks the beginning of the end of the pandemic.

    It’s high time for that! As the chart below shows, the U.S. has already lost about 314,000 people to the coronavirus.

    And what is disturbing, the current wave of infections doesn’t look like it’s going to end quickly. As one can see in the chart below, the number of new daily official cases is still above 200,000 – actually, it has recently jumped to about 250,000.

    So, the beginning of vaccine distribution is the light at the end of the pandemic tunnel that brings hope for a return to normalcy in 2021. It’s important to note that, contrary to the groundbreaking November news about the efficacy of the vaccines, the approval of vaccines and first injections didn’t plunge gold prices. This suggests that the bridge to normalcy built by the vaccines has already been priced in. That’s good news for the gold bulls.

    Second, there was renewed optimism about the fresh fiscal support. Indeed, there are higher odds now than at least about $750 billion in aid will be passed and implemented by the end of 2020. Theoretically, the fiscal stimulus is considered to be helpful for the economy, so it should be negative for gold, however, the price of the yellow metal may actually go up amid concerns about rising fiscal deficits, public debt, and inflation.

    Powell’s Press Conference and Gold

    Third, the last FOMC meeting took place this year. I’ve already analyzed it in last Thursday’s (Dec. 17) edition of the Fundamental Gold Report, but then I focused on the monetary policy statement and the fresh dot-plot. As a reminder, the Fed tied tapering in its quantitative easing to the progress toward reaching full employment and inflation at two percent, while the economic projections were more optimistic, but they nevertheless didn’t see any interest rate hikes until the end of 2023.

    However, it was Powell’s press conference that was really crucial, so let’s take a closer look at it. The Fed Chair sounded dovish, as he emphasized the U.S. central bank’s commitment to maintaining its very accommodative stance. In particular, Powell reiterated that the Fed will not hike interest rates or reduce its asset purchase program anytime soon. Actually, Powell said that the bank will normalize its monetary policy only after reaching the maximum employment and price stability:

    our guidance for both interest rates and asset purchases will keep monetary policy accommodative until our maximum employment and price stability goals are achieved. And that's a powerful message. So substantial further progress means what it says. It means we'll be looking for employment to be substantially closer to assessments of its maximum level, and inflation to be substantially closer to our 2 percent longer run goal, before we start making adjustments to our purchases.

    In other words, Powell clearly stated that he will keep his foot on the gas until at least 2023, and that he won’t pull the brakes even if inflation increases. This is because Powell believes that although inflation may rebound in 2021, it will be a temporary increase, and the Fed now has a flexible average inflation targeting framework, so it wants inflation to overshoot the target:

    What we’re saying is we're going to keep policy highly accommodative until the expansion is well down the tracks. And we’re not going to preemptively raise rates until we see inflation actually reaching 2 percent and being on track to exceed 2 percent. That's a very strong commitment. And we think that's the right place to be

    This means that in 2021 the Fed is likely to be behind the curve. Higher inflation with the nominal interest rates unchanged imply lower real interest ratesfurther declines in these rates should push the gold prices up. Moreover, Powell will announce in advance when he wants to take his foot off the gas pedal and start reducing the amount of monetary accommodation. The Fed clearly doesn’t want the replay of the 2013 taper tantrum:

    And when we see ourselves on a path to achieve that goal, then we will say so undoubtedly well in advance of any time when we would actually consider gradually tapering the pace of purchases.

    Implications for Gold

    What does it all mean for gold prices? Well, although the Fed did not expand its monetary accommodation in December, Powell was really dovish and he pointed out that the U.S. central bank would continue its current easy stance “as long as it takes until the job is well and truly done.” Gold welcomed Powell’s remarks and gained nearly $40 on Thursday, as the chart below shows.

    It makes sense – after all, the Fed promised that its monetary policy would remain highly accommodative for a long time. So, although the potential for further accommodation and, thus, a great rally in gold prices is limited (at least until we see a further weakening in the US dollar or an increases in inflation and decrease in the real interest rates), the risk of a sudden tightening in the Fed’s monetary policy, that could plunge the gold prices, has diminished. Therefore, gold could shine again – at least until the markets start to worry about the normalization of monetary policy and start to forecast increases in the interest rates.

    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.

  • Will Gold Rise after December’s FOMC Meeting?

    December 17, 2020, 10:32 AM

    With December's Fed meeting behind us, the fresh economic projections look bad for the yellow metal. However, the monetary policy statement and Powell’s press conference could support gold prices.

    The FOMC announced on Wednesday (Dec. 16) its newest statement on monetary policy. The Committee kept the federal funds rate unchanged and didn’t expand its quantitative easing program.

    In general, the statement was little changed, however, there was one important adjustment: the US central bank offered something similar to the outcomes-based guidance. I’m referring here to the fact that the Fed wrote that it would continue to buy at least $120 billion of bonds each month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals”. Previously, the statement noted that the US central bank would buy assets to “sustain smooth market functioning and help foster accommodative financial conditions.”

    In other words, the Fed now uses forward guidance not only for the federal funds rate, but also for its balance sheet. The US central bank ties its interest-rate and balance sheet policies towards its goals of reaching full employment and inflation at two percent, meaning that the Fed will not cease buying assets unless it believes that the economy has fully recovered. Wall Street can sleep well!

    All this means that the December statement could be read as slightly dovish. However, it could also be a bit disappointing for the more radical doves counting on more accommodative actions. It also means that the Fed acted more hawkish than expected, which is clearly bad news for gold bulls.

    December Economic Projections and Gold

    On Wednesday, the FOMC issued not only the statement of its monetary policy, but also its fresh economic projections. The COVID-19-related economic crisis is now expected to be weaker than previously thought, as the GDP growth is projected to be higher this and next year, while the unemployment rate is to be lower, as the table below shows.

    To be more precise, the FOMC expects that the GDP will decrease only 2.4 percent this year, while increasing 4.2 percent in 2021 and 3.2 percent in 2022, compared to a negative -3.7, positive 4 percent and positive 3 percent expected in September.

    The unemployment rate is forecasted to be “only” 6.7 percent in 2020 and 5 percent in 2021, compared to 7.6 and 5.5 percent seen in September. The fact that the recovery has progressed more quickly than expected by the central banks is another piece of bad news for gold prices. The consolation for goldbugs can be the fact that overall economic activity remains well below the pre-pandemic level.

    When it comes to PCE inflation, the FOMC now sees slightly higher inflation in 2021 and 2022 compared to September (1.8 and 1.9 percent versus 1.7 and 1.8 percent). However, the FOMC still projects that inflation will stay below its target until 2023, which will provide an excellent excuse for the continuation of its dovish monetary policy of lower rates for longer, thus supporting gold prices.

    Indeed, despite the more upbeat economic outlook – which is bad news for gold prices, when analyzed separately – the Fed sees that interest rates will remain unchanged, i.e., near zero, at least until the end of 2023 (however, one more Committee member thinks that hiking interest rates in 2023 is appropriate). From the fundamental point of view, this is the only positive news for gold, which shines under ZIRP and negative real interest rates.

    Implications for Gold

    What does December’s FOMC meeting imply for gold? Well, the price of the yellow metal declined initially, only to rebound later during Powel’s press conference. This is because the Fed Chair sounded dovish and emphasized that the US central bank would continue buying assets until “the job is well and truly done.”

    Moreover, Powell promised that that Fed would say well in advance before starting to slow down the pace of bonds purchases – and that we are far away from this moment – to avoid the replay of the 2013 taper tantrum.

    Summing up, the fresh dot chart offers a more optimistic economic outlook, which is bad for gold. The statement could disappoint some doves, but it can also be interpreted as quite dovish, as the Fed basically promised to increase asset purchases if economic recovery slows. Powell’s press conference reaffirms this interpretation, as the Fed Chair sounded dovish. All this means that although the Fed didn’t follow in the ECB’s footsteps, it remains highly accommodative. Such a monetary policy should keep the downward pressure on the real interest rates, thereby supporting gold prices. Actually, in recent years, the price of gold usually started to rise after the FOMC December meeting – but we have yet to see whether this pattern will replay again.

    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.

  • Will Fed Follow ECB, Supporting Gold?

    December 15, 2020, 7:34 AM

    The European Central Bank (ECB) expanded its accommodative stance. The Fed could follow suit, supporting the gold prices.

    The Governing Council of the ECB met last week, announcing significant, dovish changes to its monetary policy. First of all, the ECB decided to increase the envelope of the pandemic emergency purchase program (PEPP) by €500 billion to a total of €1,850 billion. It also extended the horizon for net purchases under the PEPP to at least the end of March 2022.

    Second, the ECB decided to extend the reinvestment of principal payments from maturing securities purchased under the PEPP until at least the end of 2023. Third, the ECB eased the conditions of the third series of targeted longer-term refinancing operations (e.g., through extension of the period over which considerably more favorable terms will apply by twelve months, to June 2022, and through granting more subsidized loans to banks to stimulate lending). Fourth, the ECB extended the duration of the set of collateral easing measures adopted in April. Fifth, the central bank decided to offer four additional pandemic emergency longer-term refinancing operations (PELTROs) in 2021. Sixth, the Eurosystem repo facility for central banks (EUREP) and all temporary swap and repo lines with non-euro area central banks will be extended until March 2022. Seventh, net purchases under the asset purchase program (APP) will continue at a monthly pace of €20 billion, while the interest rates will remain unchanged.

    Whoa, what an impressive list of “recalibrations” of the ECB monetary policy instruments! Why did the central bank implement them? Well, the reason is the second wave of the pandemic. As I pointed out in several previous reports, although the prospects of the rollout of the vaccines are encouraging, the pandemic continues to pose serious risks to the public health, negatively affecting the economy. The ECB seems to agree with me:

    The resurgence in COVID-19 cases and the associated containment measures are significantly restricting euro area economic activity, which is expected to have contracted in the fourth quarter of 2020. While activity in the manufacturing sector continues to hold up well, services activity is being severely curbed by the increase in infection rates and the new restrictions on social interaction and mobility. Inflation remains very low in the context of weak demand and significant slack in labour and product markets. Overall, the incoming data and our staff projections suggest a more pronounced near-term impact of the pandemic on the economy and a more protracted weakness in inflation than previously envisaged.

    So, the second wave of the epidemic dragged down economic activity, prompting the EBC to further ease its monetary policy stance. Although the ECB is officially concerned about weak GDP growth and low inflation, its main goal is to keep bond yields exceptionally low. Or as ECB President, Christine Lagarde, told a press conference: to preserve favorable financing conditions over the epidemic, to “build that bridge across the pandemic until we have reached herd immunity so that the economic recovery is well-advanced, self-sustained and inflation is back at its pre-pandemic path.”

    What does the ECB’s easing of its monetary policy imply for gold? Well, so far, gold prices were little changed in the immediate aftermath of the ECB meeting on Thursday (December 10), as one can see in the chart below.

    Chart, line chartDescription automatically generated

    When it comes to the more distant future, the ECB’s actions will put downward pressure on the bond yields, supporting gold prices. Many yields on European Treasuries are already near their lowest levels on record. The central bank promised to keep financing costs low, de facto using the yield curve control, only without the formal target.

    On the other hand, the easing of the ECB’s monetary policy and lower European interest rates should weaken the euro against the US dollar, exerting downward pressure on gold prices.

    However, investors shouldn’t forget that the FOMC will announce its own decision on the stance of the American monetary policy. Given the U.S. resurgence in COVID-19 cases and a weakening economy in the fourth quarter, the Fed is likely to become even more dovish, providing the needed support for the yellow metal.

    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.

  • How Will Gold Perform This Winter?

    December 10, 2020, 8:49 AM

    Brace yourselves, winter is coming! It may be a harsh period for the United States, but much better for gold.

    Some of you may have seen snow this year already, but the astronomical winter is still ahead of us. Unfortunately, it could be a really dark winter. Instead of joyful snowball battles and making snowmen, we will have to contend with the coronavirus. The vaccines will definitely help (the first doses of Pfizer’s vaccine were administered this week), but their widespread distribution will begin only next year. So, we still have to deal with the pandemic taking its toll here and now – as the chart below shows, the number of daily COVID-19 cases is still above 200,000 in the U.S.

    The increasing cases are one thing, but the soaring numbers of COVID-19-related hospitalizations is another, even more terrifying, issue. As one can see in the chart below, the number of patients in U.S. hospitals has reached a record of 100,000, due to a surge in the aftermath of Thanksgiving.

    Importantly, the situation may get even worse, as people spend more time indoors in winter, and large family gatherings during Christmas and Hanukkah are still ahead us…

    I know that you are fed up with the date about the epidemic. And I don’t write about the pandemic because I’ve become an epidemiologist or want to scary you; for that all you need to do is read the press headlines or watch TV for a while. I cover the pandemic because it still impacts the global economy, and in particular, it explains why the U.S. economic growth is slowing down.

    You see, in the summer and autumn of 2020, America’s economy roared back. But that might be a song of the past. As I wrote in Tuesday’s (Dec 8) edition of the Fundamental Gold Report, November’s employment situation report was disappointingly weak, and the high frequency data also point to a slowdown. For example, the number of diners and restaurants, as well as hotel and airline bookings, have declined in recent weeks.

    So, the increased spread of the coronavirus slows the economy down. A growing share of Americans, even those who were previously skeptical about the epidemiological dangers, worry about catching the virus, thereby reducing their social activity.

    However, there are also other factors behind the most recent economic slowdown. First, the previous recovery was caused by a low base and the end of the Great Lockdown. The deep economic crisis seen in the spring, with accompanying coronavirus restrictions, will not happen again. Therefore, the initial recovery was fast, but the pace of economic growth had to slow down. Second, the easy fiscal policy helped to increase the GDP, but Congress has so far failed to agree on another stimulus package.

    Implications for Gold

    What does it all mean for the yellow metal? Well, the economy could rise again when the vaccines become widely available. However, we will face a harsh winter first. It means that the coming weeks might be positive for gold – especially considering that in recent years, the shiny metal rallied in January (or sometimes even in the second half of December).

    But what’s next for gold prices? Will they plunge in 2021 after the rollout of the vaccines? Well, the vaccines are in a sense, a real game changer for the world next year. As they revived the risk appetite, they hit the safe-haven demand for gold. So, yes, there is a downward risk, although it could already be priced in.

    However, the vaccines are a game changer only in a sense. You see, the vaccines might protect us from the virus, but they will not solve all our economic problems, therefore, caution is still required. On Monday (Dec 7), the Bank of International Settlements warned the public that “we are moving from the liquidity to the solvency phase of the crisis”.

    Actually, the post-winter, post-pandemic environment might be beneficial for gold. You see, gold is a portfolio-diversifier which serves as a safe haven asset during a period of turmoil, but it performs the best during the very early phase of an economic recovery – especially as the central banks will continue the policy of zero interest rates. Thus, the new stimulus package, low real interest rates, worries about the U.S. dollar strength and debt sustainability, and fears of inflation, which will accompany the economic revival in 2021, should support gold prices.

    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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