The New RussAsian Gold Standard Is Coming

Image via KingWorldNews

It appears it wasn’t that long ago that the U.S. dollar was not to be questioned, and the ruble and the yuan were in the gutter. Such was the strength of the U.S. dollar that President Trump voiced desires to weaken it against other currencies to give America some trade benefits. Not that long ago, either, the ruble was approaching toilet paper status due to oil price oscillations.

Somehow, we are now inching towards the very opposite. The mighty greenback, despite being the strongest it’s been in a while, has everyone concerned. Nobody needs a lot of convincing to hear out the notions of “dollar hyperinflation” or even “the death of the dollar”. On the other hand sit the ruble and yuan. The first is looking to become a global reserve currency by force, with the second no doubt wanting the same, but perhaps content to simply be in the picture for now.

How did we get here? For as many things are in this brew, it seems very easy to answer that question. The West has too long suffered from an over-reliance: on credit, on faith and the money printers that run on it, on Chinese goods, and most damagingly of late on Russian energy. In what seems like a span of a few hours, Russia used the Ukraine attack to send a message to the West: if you want Russian energy, pay in rubles. And so the ruble went from toilet paper to one of the stronger currencies as of right now. One could argue, certainly the most stable.

Behind every great nation lies a great gold hoard. If Russia and China usurp the U.S. dollar’s status, there is almost no question that it will be done through the use of gold bullion as tender. Unlike the West, neither of these two massive nations have spent the better part of a century convincing themselves that gold is outdated and Modern Monetary Theory is, well, modern.

Just as Russia surprised many with the Ukraine invasion, so too might many be surprised by a bid to place both the ruble and the yuan in the dollar’s place. Russia already said that it views the ruble or gold as money, almost foretelling what it plans on doing. China’s stance doesn’t need repeating.

What do their central bank gold reserves look like, then? For the longest time, we heard how the U.S. gold stockpile of over 8,000 tons makes other nations’ reserves seem negligible. Now, again, it seems we might be in for a surprise. Apparently, in a move that shouldn’t surprise anyone, the U.S. has been leasing out its gold bullion due to storage difficulties. In other words, it’s not “readily available.”

Some of our more dedicated readers will remember that, when China’s official gold hoard figure was 2,000 tons, speculations were rife that it’s closer to 4,000 tons. As it turns out, China could be sitting on 25,000 tons of gold, while Russia could hold a comparatively smaller 12,000 tons.

When push comes to shove, if these two titans make a real bid for the global financial system, how much will faith in the dollar carry it in absence of reserves? Will the U.S. trying to hold onto its position not be akin to Hungary or Poland attempting to usurp the greenback? Indeed, if they did, would we not ask how they expect to become the global reserve with such a small gold hoard?

Alasdair Macleod calls such a development a “financial nuclear event,” and that’s probably not an exaggeration. Virtually every fiat currency on the planet would be re-valued overnight, drastically downwards, while global central banks scramble to recover their gold bullion in an attempt to strengthen their currencies.

If this does indeed happen, well, those who already own gold will be much better off than those who waited too long.

Gold’s Price Would Be a Lot Higher Except for This

Gold price would be a lot higher except for this factor

The tale of gold price this year has been one of U.S. dollar strength. Even so, Wells Fargo’s head of real asset strategy John LaForge finds current valuations puzzling. As he notes, gold would have already passed $1,900 if not for the dollar’s relative strength when compared to other currencies. While the inflation rate alone is making everyone wonder how much longer this strength can persist, LaForge believes we could see six more months of unusual dollar strength:

Our base case is that the U.S. will enter a recession somewhere in October or November, which will last until the middle of next year. Typically the dollar loses strength when signals say we are coming out of recession. So, if our base case is correct, you could see the dollar start acting weaker in Q1 of next year in anticipation of that.

Two crucial factors in gold’s price

Kitco maintains an excellent resource explaining the two crucial factors in gold’s price: demand and dollar strength or weakness. In short, the dollar affects gold’s price this way:

When the US Dollar gets stronger, it takes fewer dollars to buy any commodity that is priced in $USD. When the US Dollar gets weaker it takes more dollars to purchase the same commodity… When the dollar gets strong, gold appears to go down, and vice versa. That accounts for part of the fluctuations that we see in the value of gold.

Dollars get stronger based on demand, just like any other asset. For the time being, dollars are likely to remain a preferred safe haven option for central banks and institutional investors, who think of dollars as a convenient alternative to gold (with some obvious shortcomings). Wells Fargo retains its $2,000-$2,100 target for gold before the end of the year, stating that only a bout of unexpected dollar strength could inhibit this prediction.

LaForge doesn’t place much hope in the tightening schedule bearing the desired fruit. More specifically, he expects the long-term inflation rate to remain elevated around 3%-4%. For all their talk, LaForge thinks that Federal Reserve officials have already found 75-basis-point hikes untenable, even if they’ve done relatively little to slow down inflation.

Although consumer price increases look poised to remain the Fed’s primary concern by a wide margin, they’re unlikely to want to or have the option to hike above 50 basis points anymore. How gold performs in a recession depends on how severe the economic crisis is. Although LaForge finds a mild recession more conductive for gold’s price, it’s easy to see how an economic downturn of any magnitude could boost gold’s price. A recession, let along a period of stagflation, are tailor-made for precious metals outperformance.

Another asset LaForge is interested in are cryptocurrencies, with the analyst taking the bold standpoint of crypto enthusiasts who liken them to the internet. Crypto’s price action, said LaForge, depends entirely on how heavily the government can or wants to control digital assets.

“What’s looming in the next couple of years is the government coming in and regulating. The question is, how much? Do they take a light-glove approach as they did with the internet or a heavy-handed one? You have the example of the internet being regulated lightly. But that was with information and communications, which is important, but arguably not as important as money,” said LaForge of the asset class that is currently in its fourth bear cycle.

Here’s Another Reason Paper Gold Isn’t Real Gold

Another Reason Paper Gold Is Not Real Gold

We’ve covered to some lengths how easily manipulated the paper gold market is, and why investing in gold bullion is the only way to truly own the metal. But the issue is far from one that plagues just gold. Recent debacles in both the copper and nickel markets have reminded us how disconnected paper markets in commodities are from the real thing, and why avoiding exposure altogether is a prudent choice.

An investigation was launched after traders from numerous state-owned firms in Qinhuangdao city were made aware that a commodities storage is running thin. More specifically, the site that was meant to cover the over-the-counter copper market only has 100,000 tons of copper, as opposed to the 300,000 tons listed by the borrower. The total value of the missing copper is placed around $490 million.

In other words, two out of three investors who thought they owned a claim on real physical metal actually owned nothing but paper and a worthless promise. The paper would’ve been worth something (at least before the investigation) – the promise was equally worthless, before and after.

Remarkably, this is just one of several fiascos in China’s metals market in the span of a few months. Not long ago, Huludao Risun Trading Co was probed over missing aluminum deposits obtained with a similarly-borrowed $1 billion.

China’s issues with getting its hands on commodities highlight the strain that the Russia-Ukraine conflict has placed on the global economy, as well as the dubious strength of China’s own.

On Tuesday, London Metal Exchange halted nickel trading after prices more than doubled within the day, reaching $100,000 a ton. The price spike was tied to aggressive shorting by one of the world’s largest nickel producers. It’s the biggest crisis the exchange has faced in 145 years, and a throwback to both the 1990s copper market cornering and the five-year halt on tin trading in the 1980s.

Aside from suspending nickel trading, the LME also raised margin requirements significantly, though one could also argue insufficiently. As we know, over-leveraging is one of the biggest issues in the gold market in general, with paper gold market speculators exerting more than 30x the influence on the market compared to the metal they supposedly own.

BMO Capital Markets’ Colin Hamilton lamented how people will begin to doubt if the nickel market is a functioning one as LME also made deferrals of physical delivery of nickel. Once again, it was mentioned that Russia supplies 10% of the world’s nickel and up to 20% of the world’s battery-grade nickel.

While the invasion of Ukraine has undoubtedly strained supply, it has really only highlighted pervasive issues with the broader commodities market. Long before the conflict was mentioned, it was commonly-accepted that a full implementation of the Basel agreement could collapse the banking, if not altogether the financial system. Economists and pundits knew that banks simply don’t have the physical backing of the precious metal that they have been trading in in the spot market.

Both the halting of nickel’s trading and its explosive intraday rise in price should serve as a reminder of why the paper market exists mostly to fulfill a speculative pastime. Commodities, with gold hardly being an exception, are only really in someone’s possession so long as the vault is checked often and thoroughly.

Remember: if you can’t hold it in your hand, it isn’t real, physical gold – it’s just a paper promise of questionable value.

Preparing to Thrive When Stagflation Strikes

Preparing to Thrive When Stagflation Strikes

Bob Prince, co-CIO of Bridgewater Associates (the world’s most successful hedge fund), has a very thought-provoking article published recently on Financial Times. He’s joined the chorus of analysts, central bankers and everyday folks convinced that the global economy is teetering on the brink of, or already toppled over the edge of, a stagflationary precipice.

That’s truly bad news. Even worse, most Americans saving and investing today simply haven’t seen an economy wracked by stagflation. They don’t know what to expect, or how to prepare.

Fortunately, Prince has some actionable suggestions.

What is stagflation?

Stagflation is a toxic brew of high inflation and economic stagnation (stagnation + inflation = stagflation). Normally, these two fiscal forces strike at different times. High inflation is typically a symptom of a booming economy and a tight labor market. Stagnation, on the other hand, a period of low-to-negative economic growth, usually co-exists with low inflation and high unemployment. Stagflation is the worst of both economic conditions.

Prince describes stagflation like this:

a high level of nominal spending growth cannot be met by the quantity of goods produced, resulting in above-target inflation. Policymakers are not able to simultaneously achieve their inflation and growth targets, forcing them to choose between the two.

Fortunately, stagflation is a relatively unusual phenomenon.

Unfortunately, it’s also the correct way to describe some of the worst economic episodes in American history, including the Great Depression.

Why is stagflation a fait accompli?

Because worldwide economies are weakening, slowing due to a combination of factors:

  • Ongoing Covid lockdowns (especially in China)
  • Supply chain disruptions
  • Russia’s invasion of Ukraine and Western financial sanctions in response
  • Massive, global deficit spending in the early stages of the pandemic panic

These forces have fueled global inflation. Prices are surging at 41-year record levels in the U.S. Canada isn’t far behind. The Euro zone is seeing the highest inflation since its inception in 2001.

Global central banks are slowly responding to rising prices by raising interest rates, in an effort to “cool down” overheating economies. However, it’s already too late. Yes, the global economy was overheating — but ran out of gas about the same time central banks started hitting the brakes.

Subsequently, instead of slowing the economy smoothly to cruising speed, it’s looking more and more like the global economic system will shudder to a full stop (or possibly shudder and shimmy along like a beginner learning to drive a car with a manual transmission).

Here’s what Bridgewater recommends to preserve our savings

To begin with, Prince warns us, everything we thought we knew about investing is wrong:

Historically, equities have been the worst-performing asset in stagflationary periods, because they are vulnerable to both falling growth and rising inflation. Other predominantly growth-sensitive assets like credit and real estate also perform poorly.

Well, what about bonds, the historical counterweight to risky equities?

Nominal bonds are closer to flat in such environments. This reflects the cross-cutting influences of falling growth that typically leads to easing and falling rates, weighed against rising inflation expectations which usually put pressure on rates to rise. As rates increase generally, the yields on existing bonds can appear less attractive, pushing prices down.

“Close to flat” isn’t what we want, especially when “flat” means “negative after inflation.”

If that’s what doesn’t work, then what does?

Inflation-linked bonds and gold perform the best, with the former benefiting from both weak growth and rising inflation… index-linked bonds, gold, and commodities giving investors better relative returns regardless of how policymakers respond.

Just for historical comparison purposes, gold’s price rose 400% over just four years during the last episode of stagflation in the U.S. (1971-1975). There’s a reason investors and central banks around the world rely on gold. Gold’s historical track record as a safe-haven investment deserves scrutiny.

Gold’s Summer Price Performance and the Prism of Uncertainty

Golds Summer Price Performance and the Prism of Uncertainty
Shopping for gold now, before the price goes up…
Public domain image by Joseph Hendricks, U.S. Navy

It’s tradition to remind gold investors that summer is the weakest quarter in the year for the metal. Lackluster performances in June, July and August tend to be the norm.

Yet an analysis on Seeking Alpha highlighted why this year, gold’s summer woes could easily end with a tepid June.

Gold often outperforms even during its worst quarter

As the analysis notes, it’s not unheard-of for gold to outperform during its worst quarter. That’s precisely what happened two years ago, as the metal moved to post a then-all-time-high of $2,070 in August.

While the analysis cites stock market panic as the primary reason, the truth is that broad uncertainty was by and large the real driver.

Let’s not forget that, traditionally, all financial markets are more thinly-traded in the summer. Wall Street flees the concrete canyons of Manhattan to sip single-malt Scotch in the Hamptons, or relocate to their summer homes on Nantucket and play sailboat on their yachts.

Financial markets don’t slow down, not exactly, but overall, volume tends to decline. Volatility, too, tends to be lower during the summer months (here’s a 20-year retrospective). Although there’s no obvious and pleasing pattern in the chart, volatility peaks tend to happen less often when so many traders are away from their desks.

Overall, volatility and gold’s price tend to be negatively correlated, albeit weakly. You’d expect a stronger negative correlation, wouldn’t you? Keep in mind, though, that old Wall Street saying, “In times of crisis, all correlations go to 1.”

So how’s this summer shaping up? Another snoozefest for gold?

It probably depends on inflation reports…

Are we one inflation update away from a new gold all-time high?

Today’s economic environment seems even more bullish for gold. May’s 8.6% CPI year-on-year increase marked the third consecutive month of what’s shaping up to be an inflation superspike. May’s report affirmed that, so far, there haven’t been any improvements. Rather the opposite.

Remember, the last two inflation superspikes both happened during  the 1970s, during the stagflation episode. Gold’s price tripled during the first bout, and quadrupled during the fourth.

The theme of inflation forcing the Federal Reserve to tighten monetary policy, and a subsequent train wreck in the stock market? That happened in the 1970s, too. So what’s different this time?

For starters, the benchmark interest rate back then was 13% compared to 1-and-a-fraction percent as it stands today. With that in mind, thinking of bonds as a credible alternative to gold would be outlandish.

The disparity in the rates further places into question what difference the Fed can make to stop inflation – without cranking the Effective Federal Funds Rate into double digits and above. (Just think of the howls we’d hear from Wall Street if that happened…)

The analysis points out that the current inflationary superspike isn’t likely to end until the dollar supply is normalized. In other words, you can’t inflate the money supply by 40% (this isn’t a joke, look at the chart) without expecting these kinds of consequences!

The Fed is trying to do this with tightening, but it’s already caused a recession in the U.S. and other nations, also playing catch-up, seem determined to do the same. From Australia to South Korea, Canada to the Euro zone, a global downturn seems nigh inevitable. (Many are already calling out Fed officials and saying that they’ll have to revert to an easy-money policy sooner rather than later – before even raising interest rates above 2%!).

Say the Fed does blink in the face of a stagnating economy – what prospect will be left besides hyperinflation? Recent polls showed that inflation is at the forefront of Americans’ minds and consumer confidence is low. It’s not clear what could bring a change of hearts.

All of this indicates a heightened demand for gold this summer. Wall Street may check out for the summer. Big traders may not be at their desks. But we seriously doubt that the average American family will be quite so complacent. With dollars buying less and less food and fuel month after month, we fully expect to see a broad-based surge of interest in gold as the inflation-resistant investment par excellence.

Don’t be surprised if the lowest days of gold’s price are behind us. We don’t expect this to be a quiet summer for the gold market.

Even Legendary Stock Bull Jim Cramer Recommends Gold These Days

Even legendary stock bull Jim Cramer recommends gold these days. Creative commons image via Wikimedia.

As if investors needed any more reminding about economic conditions, CNBC’s Jim Cramer recently recommended Americans diversify with gold in one of the network’s financial features. Cramer, whose show mostly covers the stock market, said he likes gold as one of only three assets in a recession. The other two?

Well, honestly they’re a little less accessible to the average American… “Masterwork paintings” and, well, there’s just no other way to say this, “incredible mansions.”

The almost ridiculous nature of the other two items on the list tells us a few things. It seems that Cramer, like many others, views gold as the only asset one can truly fall back on during times of crisis. Consider for a moment the liquidity of “masterwork paintings,” or the wisdom of the time-honored phrase “One man’s trash is another man’s art.” What defines a painting as a “masterwork,” exactly?

Or how often does an “incredible mansion” go up for sale? What qualifies it as “incredible” rather than, say, an everyday “mansion”?

Finally, just how easy are these tangible assets to buy and sell?

Of Cramer’s three recommended assets, only physical gold is fungible, liquid and (most importantly) accessible to everyone. It’s also a lot easier to recognize than “masterwork” or “incredible” investments.

What’s the best way to own gold? Cramer doesn’t recommend an ETF or mining shares:

Physical gold is the cheapest way to do it.

This recommendation didn’t come a moment too soon, either… What could have been considered a “consumer crisis” in the form of four-decade-record inflation has now come for stock market investors – in a big and brutal way. As of last Monday, the S&P 500 officially entered a bear market, although it was only a formality given its 20% year-to-date losses.

So long as the stock market is performing well, it’s as if there is no trouble. We can, for example, ignore an 8.6% inflation rate that is rising past 40-year highs despite Federal Reserve policy tightening. But when trouble hits stocks, it’s panic time.

Cramer’s wording is telling enough, as he does seem to acknowledge that we are either in, or headed towards, a recession. For as many analysts, experts and banks that we can find cautioning against an extreme risk of recession, there are almost as many going the other way. It won’t take long to find a forecast that dismisses the notion of a recession entirely or otherwise says a crisis will be short-lived.

It begets the question: what exactly is needed for someone to ring the recession bells? Businesses were hammered by lockdowns and only kept up by monetary stimulus that has now dissipated. The same holds true for large, publicly-traded companies. The stimulus-ending crash is actually worsening what would have been a “natural” correction of the longest bull market in stock history.

Then we get to inflation. The Federal Reserve’s only stated way of bringing inflation back to 2% territory would be to cartoonishly increase the nominal interest rate, as with any other central bank. Inflation is, after all, a global theme. It just so happens that the U.S. government has a $30 trillion debt, on which it has to pay interest. The larger the interest rates, the greater the debt payments. The same holds true for corporate and private debt.

We are three years into a crisis, but we are reaching the territory where Wall Street, central banks, private banks and the like can no longer look away. Their preferred method of dealing with financial crises, or the only method ever utilized, was bailouts. That’s how 2008 was swept under the rug.

Yet the bailout already happened early on into this crisis, with $4.6 trillion being “produced” to pretend like nothing’s happening. The bailout worked in 2008, but it has clearly failed this time around. We again find ourselves in uncharted territory.

In the 1970s, interest rates were 13% (compared to today’s 1.5%). That’s why the hiking approach somewhat worked. In 2008, inflation was near the 2% target, rather than above the 40-year high of 8.6%. That’s why the money-printing approach somewhat worked.

It shouldn’t be surprising to hear that Cramer likes the only asset proven to hold its ground in any situation, along with large houses full of nice paintings.

How Are Sanctions Against Russia Affecting Precious Metals?

How Are Sanctions Against Russia Affecting Precious Metals?

We’ve yet to hear about a disruption in Russia’s mines. Polymetal and Kinross, two mining companies with operations in Russia, report that the invasion hasn’t affected their day-to-day. Polymetal said that they have a year’s worth of supplies on hand. So what are we to make of the price action in precious metals, particularly in the case of palladium?

A week into the conflict, the “least famous” of the four precious metals jumped to $3,000, a level last seen two years ago. Over the past years, palladium has been a steady outperformer and has caught many off-guard with its valuations. Should things continue this way, we may yet develop a palladium standard.

Part of this has to do with an increase in demand, as the metal is being used in more and more vehicles. But certainly, a sizeable part has to do with the supply picture. Estimates show that last year Russia accounted for 43% of the global palladium production. It has never been the easiest country for a foreign company to start a mining operation in. Now, with Western and even Japanese sanctions against Russia, the supply picture isn’t looking the brightest.

Despite its reassurances, shares of Polymetal dropped. ALROSA, Evraz and Ferrexpo, all miners operating in Russia and Ukraine, mimicked the price movement in the equity market. With nearly half of the world’s palladium being produced in a country that is now essentially cut off from the rest of the world, investors are understandably expecting supply shortages. Though not to the same extent, the same holds true of platinum, 10% of which is produced in Russia.

If palladium and platinum are going to experience a deficit due to production, gold’s might come from demand. The way that the invasion has already begun spilling over into the commodities market is telling. Arcelor Mittal halted operations at its underground iron ore mines in Ukraine and slowed down production at the Kryvyi Rih steel plant. Ferrexpo yelled Force Majeure as the Pivdennyi port terminal was suspended when the invasion started. Polymetal said it’s preparing for all kinds of scenarios, in short. And Japan’s Nippon Steel is looking to Latin America and Australia to source metals due to expected shortages from Russia and Ukraine.

Uranium, coal and aluminum are also some of Russia’s key exports. So it doesn’t take much looking to see how this could spill over into an industrial commodity crisis. Add to this the increased difficulty of operating mines due to inflation, and we have a case for investing in gold.

Silver is, in a sense, positioned to receive benefits from both sides. Its supply comes primarily as a byproduct of mining other metals, like the aforementioned ones. The investment demand is, depending on the chart, somewhere between lower and higher than that of gold. And who could forget that there is a green energy headline around every corner? We’ve heard that precious metals were about to take their turn in this commodity cycle, and it seems like they might loiter for a while.

Goldman Sachs: When Risks Rise, Gold Is Your Best Bet

Goldman Sachs: When Risks Rise, Gold Is Your Best Bet

The current geopolitical environment highlights the many reasons gold can thrive in any scenario. It’s a reminder to the attentive investor why gold has been the financial hedge of choice throughout recorded history. Let’s examine how gold compares with other assets when market volatility, recession, geopolitical conflict and inflation are all risks that are either on the horizon, or have already materialized.

Gold vs. “digital gold”

Bitcoin has emerged to prominence for several reasons, not the least of which is its fixed-supply cap. In January, the CPI saw its fastest monthly rise since 1982, exceeding already-pessimistic inflation expectations. Investors and even those who have previously had little to no interest in actively managing their savings are growing wary of currency depreciation. In other words, as time passes, each dollar buys noticeably less. A quick glance makes a fixed-supply asset look very appealing when trillions of dollars are being printed.

Yet, in a recent note, Goldman Sachs’ analysts called bitcoin a “risk-on inflation hedge” and gold a risk-off inflation hedge. The top crypto is, for better or for worse, infamously volatile, having recently shed 50% from its November high. With clear signals of a growth slowdown and worries over a recession, the team views a long gold position as the best way to protect oneself against market downturns. Recent history has indicated that, while bitcoin and other cryptocurrencies have tremendous growth potential, their astonishing volatility is all-too-tightly correlated with speculative, “risk-on” investments. By this measure, bitcoin isn’t a suitable hedge.

Gold as the investment of last resort

It seems that traders are equally concerned and unconcerned about a conflict between Russia and the West, the latter by proxy via Ukraine. Some estimate an only 10% chance of a true shots-fired escalation. Nevertheless, there has been no shortage of scrambling among traders. Any conflict would make riskier investments, such as equities, vulnerable to a market rout. So what are some of the options traders are exploring to cover their bases?

With the cost of defensive assets going up, investors are betting on everything from French and German stocks to safety in the U.S. dollar and the yen. But one hardly needs reminding that the stock market can never really offer protection. And in the face of the highest inflation in decades, is hedging with paper currencies really a good idea?

Roberto Lottici, fund manager at Banca Ifigest in Milan, has minimized both cost and exposure to risk by doubling the gold and silver allocation of his fund to 6%. It’s a percentage many would find conservative even in the absence of huge red flags. Nonetheless, to Lottici, it’s enough to offer peace of mind in whatever scenario unfolds.

“If the situation spirals out of control,” said Lottici, “then it’s going to be one of the very few assets that can offer protection.”

That’s just the thing with gold, though: even if the Russia-Ukraine situation unfolds in the most peaceful manner possible, Lottici won’t regret his precious metals allocation. Just the opposite, as any of the aforementioned risks stands prepared to turn gold from a hedge and into a top performer.

For Gold Investors, the Glass Is Half Full

For Gold Investors, the Glass Is Half Full

As VanEck Portfolio Manager Joe Foster notes, for gold last year was a lot less disappointing than traders might have one believe. One of the best things about long-term investment in sound assets is that there is no urgent need for outperformance. And while we didn’t notch a new all-time high gold price, we got plenty of solid footing and a stage for gold to continue its climb.

Gold’s price trend in context

Perhaps the most important takeaway is that gold’s price averaged $1,250 from 2013 and 2019. In a little over a month, it will be two years since the market crash which redefined the word uncertainty. Despite a somewhat steep fall from its all-time high, gold’s price since the crash has averaged $1,817. That’s a 44% increase based on average prices. We could argue that gold’s price should be higher, given the macroeconomic conditions and ongoing uncertainty, but that’s just speculation.

The fact is that gold’s average price surged since the Covid crash.

Foster notes that gold is at historically high levels even after a year of many factors working against it.

The dollar’s effect on gold’s price

Despite a tidal wave of multi-trillion-dollar stimulus printed in the last two years, the U.S. dollar index ended 2021 up 6.4%. And perhaps because of this stimulus, the year was marked by absolutely manic risk-on investment. Equities, real estate, crypto, junk bonds, leveraged loans, SPACs, the rare whiskey index and cartoon monkey images all skyrocketed in price. This is the so-called “everything bubble,” brought to you by Federal Reserve Chairman Jerome Powell with a combination of massive money-printing and near-zero interest rates that pushed investors desperate for yield into some of the strangest corners of the market (and even invented new ones).

Well, that’s one consequence of the Fed’s actions. The other? Levels of inflation across the board that dwarf anything we’ve seen in the last 40 years. We have to go back to 1984, the tail-end of the Carter-era stagflation episode, to see anything like it.

Here’s what gold has going for it

With gold showing exceptional resilience even in such an inflationary environment, we’d do well to go over some of the things that are working in the metal’s favor. And there’s no untying them from inflation.

Foster urges anyone who thinks that gold missed an inflationary period’s upside to reconsider. There have only been two such stretches in the last 50 years, one in the 1970s and the other between 2003 and 2008. We all know what happened to gold prices after each. Unsurprisingly, both were very much characterized by the same kind of not taking inflation seriously until we have to sentiment that we’re seeing from the Fed today.

Foster thinks we’re witnessing the start of a wage/price spiral that will keep driving prices up (though arguably it’s already well underway). S&P CoreLogic Case-Shiller National Home Price Index rose 18.8% in November (latest figures) year over year. The priciest housing market in history coincides with a lack of job creation, leaving the U.S. with 21 million fewer people employed than before the Covid crash.

Foster points out that inflation-adjusted, average hourly earnings have declined by 2.7% so far this year. In an example of inflation psychology setting in, unions are negotiating to get cost-of-living adjustments (COLAs) written into their wage contracts. All this, and we’re expecting yet another year of spikes in prices of basic goods amid ongoing supply chain disruptions.

What about the Fed’s plan to raise interest rates?

As for policy, the federal government wants to print and spend more money. The Federal Reserve is taking it away. At least, they’ve threatened to take it away…

UBS analyzed the Fed’s previous three rate hiking schedules, those in 1999, 2004 and 2015. As was the case last year, gold pulled back 5%-10% six months before a hike and then gained 10%-20% after each initial hike.

It goes without saying that the fourth hiking schedule could make way for gains beyond even those. So even the most long-term gold investor should find plenty of good news for gold’s price in the year ahead.

Surging Inflation Launches Gold Rocket “To the Moon”

Inflation is the fuel that will send the gold rocket to the moon

The Bureau of Labor Statistics (BLS)’s December 2021 inflation update pushed the cost of living to a nearly 40-year high of 7% after nineteen consecutive months of increases. A far cry from the Federal Reserve’s self-imposed target of 2%.

The bad news is, inflation is most likely headed higher. The most recent Producer Price Index (PPI) report, which tracks cost increases at the manufacturing level, measured 9.7%. The official BLS press release didn’t even try to sugarcoat the news…

the largest calendar-year increase since data were first calculated in 2010.

Gold futures climbed and continue to climb on this double helping of bad news.

As Peter Spina, president and CEO of Goldseek put it,

The most important takeaway for gold here is that gold is a rocket ship and inflation is its fuel. Now with inflation showing itself to be baked into the system and growing recognition of inflation, gold is going to benefit in a big way.

The U.S. dollar fell against most currencies after these reports. It seems as though global traders aren’t really expecting the Federal Reserve to follow through on its 3 predicted price hikes in 2022 (or maybe they’re already priced in?)

Jeff Wright, chief investment officer at Wolfpack Capital, said of Powell’s recent comments,

No fireworks, rather dovish and no surprises. Gold has done well with Powell’s ‘go slow’ management of the Fed.

On the downside, Wright said there’s a possibility that both quantitative tightening and tapering could accelerate, which would stop a gold rally in its tracks.

What are the odds?

Bond king on “recession watch”

Jeffrey Gundlach, the billionaire “Bond King” doesn’t think the Federal Reserve will be able to thread the needle and bring the economy to a soft landing.

Inflationary pressure is building. If we look at the economy, it’s undeniable that’s been supported by the quantitative easing and the Fed’s balance sheet expansion. And since that’s going away, it is just not plausible to think that we don’t have more headwinds in 2022 for risk assets and, ultimately, for the economy. The signals from the bond market are starting to look a little bit like a pre-recessionary period.

Gundlach believes gold is the best asset to hold in periods like this, when inflation consumes so much of our purchasing power and the world’s central banks don’t seem able to contain the chaos.

He’s bullish on gold because he’s bearish on the long-term value of the U.S. dollar. And when dollars shrink in value, it takes more and more of them to buy the same amount of gold. (From this perspective, buying gold early offers a sort of discount…)