Gold Rises on Inflation, Exhaustion of Stock Market Optimism, and This

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Gold Rises on Exhaustion of Stock Market Optimism, Fears of Inflation, and This
Photo by Sabrinna Ringquist

Sentiment from both Wall Street and Main Street has gotten progressively more bullish on gold over the past few weeks, and with good reason. Gold has now posted its third straight week of gains and appears to be looking for another resistance level to breach.

The metal’s move past, and stay above, the important $1,800 level has been in focus for many. Friday’s trading session had it inching towards $1,830 before closing the day above $1,810 in yet another example of bullish action that has been on full display for nearly a month.

Gold may drop before it launches much higher: Newton Advisors

Newton Advisors’ founder Mark Newton says that, from a broader standpoint, gold’s price could experience another significant dip below $1,750 that would let investors get in on the action. Newton told CNBC that this is because June and July are traditionally the weakest months for gold in a year, making the latest run all the more impressive.

Regardless of whether gold experiences such a pullback, Newton says $1,855 is the next level to watch out for and that breaking it will most likely have gold pushing towards new highs. The gains over the past weeks came in good part over doubts that the global economy will recover as some optimistic forecasts are claiming.

Inflation is only the second most-important issue: Mobius Capital Partners

It can also be interpreted as an exhaustion of optimism in the more risk-on markets, a stance that was very much prominent heading up to June. Seasoned investor and co-founder of Mobius Capital Partners Mark Mobius believes that the narrow focus on inflation has actually sidelined a much bigger problem.

As investors and people worry about prices of goods and services rising, many of them forget that the true cause of this is currency devaluation, said Mobius in a recent interview. Mobius is one of a number of prominent experts who doubt in the accuracy or even altogether relevancy of the CPI as an inflation gauge.

While the CPI rose this year at its fastest pace since 2008, Mobius says that it leaves too many factors out and that prices are actually rising much more rapidly. The spike in prices, says Mobius, is the result of a currency losing its value, as has unfortunately been the case throughout history. This is why companies treat any spike in inflation as currency debasement, and why gold is likely to come into prominence as a store of wealth over the coming months.

Mobius’ comments over currency devaluation come during a time when the U.S. dollar faces some of the biggest threats to its status in a long time, partly due to money printing and balance sheet expansion and partly due to a broader loss of faith in fiat. In general, Mobius expects gold to continue moving up along with inflation, especially since central banks are actively targeting it instead of attempting to deflate their currencies as part of standard policy.

Wall Street, Main Street Bullish on Gold

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Wall Street sentiment regarding gold’s price trajectory is shifting to the upside in considerable fashion, joining the already-optimistic Main Street traders. The Kitco gold price survey from last week showed 69.2% of Wall Street analysts surveyed expecting prices to move higher this week. No bearish votes were cast, with the remaining 30.8% predicted a neutral or sideways-only price movement.

Main Street was a bit more evenly spread, though still heavily favoring the upside. Nearly half of retail investors surveyed (49.6%) forecast higher prices this week, while 25.8% were bearish and 24.6% were neutral.

Despite little price action last week, analysts generally agree that a move to the $1,750 support level will be met with a strong correction, while a breach of the $1,800 level will continue to establish new highs for the metal.

Specific analyst commentary on gold in the short term

Marc Chandler, managing director at Global Forex, views a scenario where gold touches $1,750 before bouncing to the $1,800-1,815 range this week as the likeliest.

Kitco’s senior analyst Jim Wyckoff also finds the range important, noting that a move above $1,800 would set the trend for prices to go higher.

RJO Futures senior commodities broker Daniel Pavilonis is especially focused on a close above the $1,820 level. If it happens, Pavilonis thinks the market could be in for some explosive price action. Besides gold finding consistent support above the 200-day moving average, Pavilonis also said that the latest bout of strength in the U.S. dollar appears to be exhausting.

Colin Cieszynski, chief market strategist at SIA Wealth Management, is also notably bullish on gold. Cieszynski pointed to strong technicals as a reason to believe that gold might be getting ready to break out from the aforementioned range and continue moving up.

How is recent news affecting gold?

In general, the lack of any notable rise in gold price has been attributed to mixed signals from the Federal Reserve and corresponding data. The dollar continues to hold ground amid both peak inflationary expectations and rising inflation across the board. The latest data reports were likewise a mixed bag, with better-than-expected U.S. non-farm payrolls being met with a rise in unemployment.

The data still fell short of optimistic forecasts, however, and both Treasury yields and the greenback fell after the report. Analysts also noted that a lower trading volume on Monday due to the 4th of July holiday in the U.S. could result in some additional delays before gold finds a spot above $1,800.

Short-term vs. long-term views

Although analysts do enjoy attempts to predict the future, if you don’t work in the financial news industry, you’re probably better off keeping your eye on the horizon. When you look at gold’s performance over time, that’s when it really begins to shine.

Buy the Dip While Panic Selling in Gold Lasts

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Buy the Dip While Panic Selling in Gold Lasts

Gold has always been prone to bearish Wall Street sentiment and investor overreactions, and this was perhaps on full display after the latest Federal Reserve meeting. Optimistic GDP forecasts and hints at interest rate hikes in 2023 and onwards sent gold tumbling to a two-month low, with weekly losses above 5% percent. Yet, as usual, the drivers of the move downwards are questionable at best.

Adrian Day, president of Adrian Day Asset Management, said that the Fed meeting was actually bullish for gold upon closer inspection. He expects prices to bounce back in the short-term. Day notes that the Fed chair essentially said the government wants to rein in its loose monetary policy, but doesn’t have a way of doing it. This is clearly demonstrated by their inability to hike rates for at least two more years.

Day believes a lot of the selling was automated on some level and that investors will soon return to their previous bullish outlook.

Colin Cieszynski, chief market strategist at SIA Wealth Management, said that markets were looking for an excuse to rebalance from technically overbought gold and oversold U.S. dollar, and that the Fed meeting was just that.

Cieszynski said that it wasn’t so much the Fed’s projections that caused the pullback, but rather the signal that officials are looking for a way to tighten monetary policy. While the statement alone was enough to send the markets selling, Day is among the numerous experts who don’t see any feasible way for the Fed to either tighten its monetary policy or subdue inflation.

The latter has been an especially prominent talking point as of late, with core and consumer inflation rising at their fastest pace in over a decade and consensus forecasts that more inflation is coming. Phillip Streible, chief investment strategist at Blue Line Futures, said that his firm has been waiting for an opportunity to buy gold.

Streible said his company has already started buying the dip, noting that they are positioning themselves for higher inflation accompanied by weaker-than-expected growth later in the year.

Last week’s Kitco News Weekly Gold Survey of 18 Wall Street analysts showed that 56% were bearish on gold in the short-term, with bullish and neutral sentiment tied with 22% votes for each. A Main Street poll with 2,174 respondents showed considerably more optimistic sentiment, with 52% of voters expecting gold to bounce back this week, 31% expecting additional pullbacks and 17% voting neutral.

In Russia’s Sovereign Wealth Fund, the Dollar’s Out and Gold Is In

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In Russia's Sovereign Wealth Fund, the Dollar's Out and Gold Is In

The tale of Russian gold purchases has taken yet another interesting turn that might, at first glance, be difficult to decipher. After spearheading central bank gold purchases year after year in an almost boastful fashion, as if to remind Western interests that sanctions imposed on the nation can only accomplish so much, it ceased all purchases last March.

Its central bank gave a vague statement and has made no official purchases since then, only making two small sales. It was quite the shift from purchasing gold bullion in double-digit tonnage every month, but nonetheless left the country with the fifth-largest sovereign gold stockpile in the world, amounting to 2292 tons.

Russia’s National Wealth Fund

When people talk of sovereign gold stockpiles, they almost invariably refer to the amount of gold owned directly by a national central bank. Yet just as Russia so often blurs the line between public and private business, it appears that the same effect is happening with its national fund allocation. The $185 billion National Wealth Fund (NWF) is the latest edition of Russia’s state wealth fund. It has changed names since its introduction in 2004, but its focus was always on having a diverse portfolio that would protect Russia’s state budget against oil price fluctuations and secure the nation’s pension fund.

In December 2019, Russia’s Finance Minister Anton Siluanov made a statement that the fund should invest in gold due to the metal’s reliability. In November, the Russian government came up with a proposition that would allow the NWF to buy and store gold, and on May 21, an official announcement was made that the fund was greenlighted to do just that. The gold, unsurprisingly, will be stored with Russia’s central bank.

Where does the money come from?

The NWF is similar to the sovereign wealth funds owned by many nations who enjoy budget surpluses. Norway, China, and Abu Dhabi currently place in the top 3 for fund balances. The concept is simple: money in a sovereign wealth fund gets invested like a pension or an endowment, with profits accruing to the fund (and, by extension, the nation).

Like Norway’s and Abu Dhabi’s funds, the Russian sovereign wealth fund takes its seed capital from the nation’s oil industry. Any Russian oil revenue that isn’t allocated to the federal budget goes to the NWF, and the NWF spends it on a wide variety of assets.

Perhaps the worthiest of mention here are foreign exchange and foreign debt securities, which will likely lessen in favor of gold and precious metals over the following months and years.

Last year, gold officially become a bigger component of Russian reserve assets than U.S.-dollar denominated assets. It has since continued to de-dollarize amid risks of sanctions from both the U.S. and the European Union.

Gold’s popularity as an asset

Various nations that have purchased gold officially over the past few years cited the metal’s utility as a tool for sovereign influence and a universally-accepted store of value, despite having no immediate threat of sanctions unlike Russia.

In short, the new legislation means Russia can continue hoarding gold and dumping dollars under the guise of sound portfolio management. While the NWF issues supposedly accurate allocation reports, the same can’t be said of the State Fund of Precious Metals and Precious Stones, another government branch that does not publish reports on its gold reserves. As sovereign nations open up about the importance of owning gold to maintain clout on the global stage, Russia now has three different investment vehicles through which it can increase its bullion stockpile and lessen dependence on foreign assets.

Gold’s Heading Up for Many Reasons. Here’s the Weirdest One

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Gold's Heading Up for Many Reasons. Here's the Weirdest One

After months of sideways price action, gold appears to have resumed its uptrend, breaking out of its range and hitting a high just short of $1,890 during Friday’s trading session. With upwards momentum looking strong and the 200-day moving average passed, some are wondering what caused gold’s breakout after a fairly tepid few months. This time, the usual suspects are joined by an unusual trend that just might be the primary cause…

Inflation and dollar weakness

According to the World Gold Council, the price rise is the result of inflationary concerns, with the CPI jumping by 4.2% year-on-year in April. Commodity prices are soaring, which drives up the producer price index and increases consumer costs on virtually everything from food to homes.

In addition, the trillions of newly-printed dollars are still a primary concern for most investors. Thanks to three rounds of free money, spending has recovered so a lot of those dollars are chasing a limited quantity of goods, driving prices higher. with inflation already materializing on one front and warnings of a lot of more to come on another.

JPMorgan reports big institutional investors dumping “digital gold” for the real thing

Some experts view the recent cryptocurrency “correction” (which seems like too subtle a word to describe a 7-day 40% plunge) as the real reason behind gold’s recent price gains. Bitcoin was praised as an inflationary hedge due to its fixed supply and, in fact, was invented primarily as a counterweight to central bank malpractice after the 2008 financial crisis.

But the recent double-digit percentage correction in the market reminded investors looking for a hedge that the crypto market is, and has always been, a highly volatile one.

While bitcoin provides hedging utility, its price volatility absolutely boggles the mind. This is where gold emerges as a familiar, reliable and most of all stable asset, as an overnight double-digit percentage pullback would be virtually unheard of in the well-established market. That’s probably why JP Morgan’s report of big institutional investors choosing stable hedging with gold over volatile hedging with bitcoin.

That might be a partial explanation of our unusual fund flow report…

Paper gold funds bucking the price trend

As seen on Chief Investment Officer, Tom McClellan offers a curious take that even the keen analyst might have overlooked.

McClellan notes that spikes in gold prices are usually followed by massive inflows into large gold funds. It’s the same pattern you see in stocks: once a stock has proven it’s a winner by going up, everyone wants a piece of the success, so they buy. It’s a human reaction. It’s the closest thing to a law of investing there is.

This time is different. Despite a major upward move in gold’s price, two of the biggest gold funds (SPDR Gold Shares, GLD and iShares Gold Trust, IAU) have not gained buyers. They have not seen the kind of cash inflow that always seems inevitable when prices go up. What’s going on?

McClellan interprets this as investors still not having woken up to the goings-on in the gold market, perhaps due to the hectic economic situation affecting all other markets. This could also be seen as investors uncharacteristically holding out for further developments before making a move, which doesn’t sound bullish on its own.

McClellan explained the potential benefits of the situation this way:

The uptrend is not mature yet. It still has more to go, before we get to the point when everyone starts piling in.

“Piling in” in this case means buying paper gold, which drives up gold’s spot price, which in turn tends to attract paper gold buyers… Basically the kind of feeding frenzy that has the potential to send prices skyrocketing.

Given that gold has already broken out to the cusp of $1,900, the kind of acknowledgment and subsequent piling into funds that McClellan hints to would quickly translate to fireworks in the gold market.

If McClellan’s idea that gold’s uptrend has just started gaining traction towards $1,900, on the way to its previous all-time high, the smart investors who hold gold have plenty to be excited about.

Gold Demand Trends Update: Paper Gold Sell-Off Despite Insatiable Hunger for Physical Gold

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Gold Demand Trends Update: Q1 2021

On April 29, the World Gold Council released a comprehensive overview of the various drivers behind gold demand in the first quarter of the year, as well as covering some supply insights. Here are the most interesting parts…

Gold demand falling?

The 23% year-on-year decline in demand would, at first glance, have one believe that gold is falling out of favor. Yet, as the report notes, the percentage is almost exclusively attributed to a combination of paper gold fund outflows and central banks temporarily becoming net sellers.

Paper gold dumped (especially in the U.S.)

Publicly-traded gold ETFs (including but not limited to SPDR Gold Shares: GLD, iShares Gold Trust:IAU, Goldman Sachs Physical Gold ETF:AAAU, Invesco Physical Gold: SGLD) have been net sellers of gold for five of the last six months. January was the sole outlier with a net gain of a mere 14.3 tons globally.

What’s going on?

There are a variety of explanations: investors are pivoting into the stock market, in the hopes the stimulus-fueled boom in markets will somehow become sustainable. Investors saw the massive inflation in basic materials reported in March and moved their commodity bets away from gold, into base metals, lumber and other industrial raw materials. Or perhaps Americans learned to prefer gold they can hold in their hands to a line item on their brokerage statements, and sold paper to buy physical gold?

That would explain the extreme supply shortages gold dealers have experienced all-too regularly since early 2020. And also the reason the U.S. Mint rationed precious metals coin sales…

Interestingly, while Western funds sold off their gold, Asian funds were eager to load up on them. Chinese funds bought 11.5 tons of gold in Q1 to boost their holdings to a record 72.4 tons, with the rest of Asia reinforcing the trend of the flow of institutional gold from West to East.

The rest of the gold demand story is, well, pretty simple. Everybody wants gold.

Gold jewelry boom

From a broader perspective, it looks like gold demand is ramping up on all sides. The report points to a 52% year-on-year increase in jewelry demand, showing a massive recovery in consumer purchases in this quarter compared to the previous year. While gold demand still has room to recover in this sector, there are already numerous promising figures. The $27.5 billion spent on the 477.4 tons of gold jewelry is the highest first-quarter amount since 2013, and also 25% above the five-year quarterly average.

Although China spearheaded jewelry demand with 191.1 tons in Q1, the highest quarterly figure since 2015, and India trailed with 102.5 tons, other parts of the world showed strong jewelry purchases as well. Despite a lot of tumult in the country over the quarter, Turkey still posted a 5% year-on-year increase in jewelry purchases over the period.

In addition to a number of smaller Asian nations, the U.S. consumer base looks to have strengthened, with domestic jewelry demand growing 6% year-on-year to 24.3 tons, the highest Q1 figure since 2009.

Consumer demand for physical gold highest ever

The flow of gold from Western funds we discussed above stood in stark contrast to investment demand on the consumer side.

Q1 was the third consecutive quarter of growth in gold coin and bar demand, climbing to 339.5 tons, the highest quarterly figure since 2016. Investment demand was strong across all regions, with the U.S. posting a 77% year-on-year increase of 26.3 tons, double the five-year quarterly average.

China’s 86 tons of investment gold bought in Q1 were a massive 133% year-on-year increase and a 21% increase compared to Q1 2019. Indian retail investment grew for the third quarter in a row to reach 37.5 tons, a 34% year-on-year increase, while Turkey’s 44.3 tons were an almost double year-on-year increase.

Manufacturers bought almost as much gold as central banks

After last year’s back-and-forth, central banks returned to net purchasing with 95 tons of gold bought in Q1, and the report expects the official sector to continue with strong purchases throughout the year. The often-overlooked technology sector saw an 11% year-on-year increase in gold purchases, amounting to a total of 81.2 tons, with 66.4 tons coming from electronics manufacturers.

Gold production snapshot

Despite a recovery in mine production, overall gold supply in the first quarter fell by 4% year-on-year, amounting to 1,146 tons compared to the 1,096 tons supplied over the same period last year.

In short, it looks like the shortage we’ve seen in physical gold coins and bullion since 2020 won’t get better anytime soon. It might get worse first, between China’s big imports for consumers and citizens of crisis-stricken nations desperate for gold as a safe store of value (Turkey’s lira crisis and India’s COVID emergency).

Gold’s Perfect Storm Is On the Horizon

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Gold's Perfect Storm Is On the Horizon

The when, why and how regarding gold’s “perfect storm,” or the appreciation of an asset that many consider to be severely undervalued, is a matter of frequent debate. Mining.com’s Richard Mills believes the forecast is clear, the clouds are building, and lightning is striking closer than ever. Rising gold price will be driven by protectionist policies spearheaded by China, the likelihood of a major inflationary bout, low rates, negative yields, supply gluts and tensions.

The multiple fronts of the perfect storm

That’s quite a basket of factors, and China’s movements as of late have perhaps been of the biggest interest to some. In short order, the Asian nation has brought 150 tons of gold bullion into its country and launched a digital yuan that some believe could at some point be tethered to gold. While it might not be in China’s interest to dump the U.S. dollar as it holds over $3 trillion in its reserves, it might very well look to take the greenback’s spot as the world’s reserve given the opportunity of a banking meltdown or a currency crisis.

Having a gold-backed digital yuan would ideally position it for such a role at a time when the amount of money pumped into the U.S. economy almost echoes hyperinflation. How and when this pent-up cash will be unleashed hasn’t yet been laid out, but consumer prices are already spiking across the board, and a nearly 30% expansion in M2 year-to-date hardly means good news for the free-floating dollar.

Central banks stockpiling gold

It should come as no surprise, then, that countries around the world are stockpiling gold with various stated goals that can best be summed up as a need for solid backing. The 650 tons of gold bullion bought by central banks in 2018, and a repeat in 2019, was then seen by many as de-dollarization, but there appear to be plenty more layers to this story as the official sector returns to net buying. The supply, on the other hand, is lacking.

World’s gold production falling

A World Gold Council report showed that last year’s gold supply fell by 4% compared to 2019, with production likewise dropping by 4%. While the production losses were attributed to the crisis, Mills points out that data released by top miners shows that gold output between 2019 and 2021 could be marked with a further 9.5% decline.

Speaking of declining…

Declining and subzero bond yields make gold a preferred safe haven

The piling into gold as a safe-haven asset by investors and central banks alike has also been bolstered by the fall of the bond market. For all the criticism that the U.S. Treasury gets for having a 1.5% 10-year yield, 2.26% 30-year yield and a negative 1.1% real yield, it stands as one of the few sovereign bonds that actually offer a yield at all. For comparison, on the date of publication, here are the 10-year bond yields among several of the world’s other leading reserve currencies:

  • France: 0.084%
  • Germany: -0.25% (French and German yields quoted as proxies for Euro zone)
  • Japan: 0.077%
  • U.K.: 0.759%
  • Switzerland: -0.259%

The bond market’s sharp decline began in 2019, and many analysts believe that portfolio managers will grow to adopt gold in a reassessment of what offers a safe return of capital rather than a return on capital.

While there are various geopolitical tensions that could bolster gold’s appeal, the trade war between the U.S. and China will likely prove to be by far the biggest red flag, as the latter appears bent on diminishing the dollar on the global stage and placing itself as a reserve alternative. And, by printing trillions of dollars out of thin air with only hope backing them, the Federal Reserve will likely end up as an accomplice in any such bid.

These are all the factors of gold’s perfect storm Mills sees on the horizon. Only time will determine if this ominous forecast portends a brief squall or a hundred-year flood.

Big Gold Purchases By Central Banks: Bad News for U.S. Dollar?

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Central Banks Buying Gold - Bad News for U.S. Dollar?

According to data published by the World Gold Council, global central banks haven begun adding to their gold stockpiles. In February, the following nations added to their reserves:

  • India (11.2 tons)
  • Uzbekistan (7.2t)
  • Kazakhstan (1.6t)
  • Colombia (0.5t) 

The only notable sale of central bank gold reserves was from Turkey at 11.7 tons.

Why did Turkey’s central bank sell gold?

Nations hold gold reserves as a sort of collateral against their sovereign currency. Turkey’s currency, the lira, had a horrible day on March 22 and lost 20% of its value. In response, Turkish President Recep Tayyip Erdogan made an appeal:

I ask my citizens to invest their foreign currencies and gold in various financial institutions and bring [those assets] into the economy and production.

via BalkanInsight

Put simply: if his people listened to Erdogan’s plea and swapped all their U.S. dollars and euros and precious metals for lira, demand for lira would increase. And therefore prices would increase. It’s reasonable to assume the Turkish central bank sold gold in order to buy lira in an effort to prop up the beleaguered currency.

Note that even after this sale, Turkey has a respectable 716 tons of gold reserves.

What other central banks are buying gold?

More recently, central bank gold purchases have been in the news.

This month, Hungary announced its intention to triple its gold reserves “to help stabilise the economy amid the COVID-19 pandemic, inflation risks and rising debt.”

Back in March, Poland decided to buy 100 tons of gold.

The Reuters article even hints at a possible explanation…

Over the last decade central banks, particularly in Eastern Europe, the Middle East and Asia, have stepped up purchases of gold, often seeing it as a way to reduce reliance on assets such as the U.S. dollar.

Reuters

Is central bank gold buying a bad sign for the dollar?

Not necessarily. Most central banks around the world hold a combination of foreign exchange reserves (a collection of the world’s most-used and/or most-stable currencies) in bonds as well as gold or other precious metals.

So, in a sense, any government that issues bonds is competing for central bank customers. For the most part, only the most common currencies are considered useful as foreign exchange reserves. According to the IMF, the top five are:

  • U.S. dollar
  • euro
  • China’s renminbi
  • Japan’s yen
  • U.K.’s pounds sterling

So anytime the U.S. Federal Reserve, the Bundesbank or the Bank of England issues a bond (a promise to pay later for cash now, or an IOU), there are other global central banks who are potential customers. Along with them, what you might think of as the “traditional” customers for bonds like pension funds, insurance companies, individual savers, etc. also want bonds. More customers means more demand, and more demand means higher prices.

But what if some of that central bank demand is diverted out of bonds, into gold?

That means a diminished demand for bonds. That means a slight upward pressure on the interest rate issuing banks must offer to attract buyers. Which makes deficit spending more expensive. Sovereign bonds can also lose value to inflation.

Further, as mentioned in the Reuters article, gold isn’t subject to counterparty risk. There’s always the chance, however small, that a nation might choose to stop paying its bond-holders. (This is called a default, or a sovereign debt crisis, and they happen fairly regularly.)

There’s zero chance of physical gold defaulting. Once those gold bars are locked up in a nation’s central bank vaults, it serves as a permanent store of value.

In an important sense, when a central bank chooses to add to their gold reserves, the decision says, “We’re diversifying our country’s savings out of currencies we don’t control, into an asset class that we can trust.”

“Gold as an Inflation Hedge” to Push Gold Price to $1,850: Scotiabank

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Gold as an Inflation Hedge to Push Gold Price to $1,850: Scotiabank

In their monthly commodity report, Scotiabank went over their expectations for gold and silver in the face of what they refer to as the best economic growth in 40 years. This, of course, refers to the bank’s forecasts that the U.S. economy will expand by 6.2% this year and 4.4% in 2022.

Economic Forces Driving Gold Higher

These figures would normally be staggering, yet context is very much a key factor in this scenario. A growth of this magnitude has only been made possible in the form of a rebound from what most agreed was the biggest blow to the U.S. economy in the last century. Unsurprisingly, investors have been quick to adopt positive sentiment and have pushed both bond yields and the U.S. dollar higher, creating tremendous short-term pressure for gold.

Nonetheless, as gold price bounced back-and-forth between the $1,700 level, it pays to reassess the foundations on which the rebound, as well as the supposed growth, lie. To facilitate a recovery, the Federal Reserve had to commit to a zero-interest-rate policy along with pumping trillions of dollars into the economy. How soon and in what way this prolonged loose monetary policy will affect the nation has been the subject of plenty of speculation, but inflation seems to be on the mind of even the most optimistic market participant.

The newly-printed dollars have to go somewhere and wind up debasing the currency, and many economists believe that the effect could be felt the hardest in the form of a sudden inflationary spike. The general consensus is that prices for all base goods will see a considerable rise over the next five years. (In other words, inflation.)

$1,850 Average Gold Price per Ounce in 2021

In good part because of this, Scotiabank’s team is sticking to the average $1,850 gold price forecast for both 2021 and 2022. While the bank projects strong economic growth around the world, the ongoing negative developments surrounding the health crisis leave much to be desired in terms of certainty. It also pays to notice that countries around the world were reporting stagnant or contracting growth ahead of the crisis, with Germany’s manufacturing sector being just one example.

Regardless of how global growth unfolds over the next two years, Scotiabank sees silver as an investment that is poised to appreciate even more than gold.

Scotiabank’s Case for Silver

In the event of another flare-up, silver is well-positioned for a flock to safe-haven assets such as the one seen last year.

While manufacturing activity was contracting in 2019, industrial demand for silver was growing due to a heavy push for green energy, and it is also something that the Biden administration has emphasized. Silver is a critical component for solar panels, and also has eco-friendly uses in high-capacity batteries, water purification and electronics manufacture.

If the manufacturing sector indeed recovers as sharply as Scotiabank forecasts, silver stands to gain significant support so long as nations’ economies grow, and even more so as the developed world pivots toward a lower-carbon footprint.

A Stagflation Flashback Ahead? Keep an Eye on Gold

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Stagflation flashback ahead? Keep an eye on gold

Ever since gold’s correction from August’s high, market participants have been watching closely as to whether we will bear witness to a similar scenario to the one between 1971 and 1980. Back then, economic conditions eerily mimicked what seems to be on the horizon today: a stagflation environment propelled by low growth, rising prices and excessive interest rates.

That bout of stagflation came, most would agree, as the result of the U.S. dollar being untethered from gold. The metal subsequently jumped from its $35 tether valuation to $200, corrected to $100 and then soared far above to reach $850 within a few years’ time. What might we guess, based on this historic pattern?

Today there’s no tether-based gold valuation. Recent calls for a return to a gold standard or a similar tangible backing of the dollar from various corners have very much driven that point across.

The Federal Reserve maintains inflation is running well below its stated annual target of “around 2% on average,” and that they know this because their measurements are accurate. We are forced to wonder how that’s possible, given the historic amount of money printing. Even such a luminary as former U.S. Treasury Secretary Lawrence Summers fears the nation could be facing its biggest inflationary problem in 40 years.

Wealth preservation and inflation concerns

Reports from various government mints show that precious metals purchases have maintained their record-shattering pace over the past few months ‑ regardless of fluctuations in price. In other words, buyers seem very much concerned about long-term wealth preservation and aren’t deterred by momentary corrections.

And it appears they have every right to be.

With the debt bubble ballooning and government deficit perpetually increasing, many wonder how and when the Fed will choose to address these issues. In the absence of a debt default (which is viewed as highly unlikely), the remaining options boil down to spending cuts, tax increases or allowing inflation to run its course.

Spending cuts mean austerity, less services for taxpayers, less money for special interests. That’s simply not a politically tenable path.

Tax increases could raise funds for federal coffers. On the other hand, taxing the wealthy all too often results in nothing more than emigration to more wealth-friendly nations. To raise taxes on a thing is to risk driving it away.

That leaves us with inflation, which seems to be the Fed’s favored option. And it is almost certainly already underway.

Inflation destroys debts

The Fed’s comments indicate the official sector has braced for a public response over claims they wouldn’t oppose inflation running past the desired target. Given how the Fed measures inflation, it seems citizens are especially vulnerable to being caught by it off-guard in the form of a sudden spike in consumer prices.

On this topic, Indonesia’s 30% increase in tofu prices since December, Russia’s 60% rise in sugar prices over the last year and a 20% spike in grain prices are worrying examples of how consumer goods can shoot up both suddenly and unevenly.

The market response to a high-inflation environment is fairly well laid-out. An initial boost of the stock and real estate sectors is followed by erosion of purchasing power, together with excessive monetary demand, a loss of confidence in fiat currencies and an ongoing increase in money printing.

Look familiar? Initial boost in stock and real estate? Check. Erosion of purchasing power? See food inflation data above (or recent stories about manufacturing concerns over steel or lumber prices). Excessive monetary demand? Yes in capitals; businesses are issuing new debt at a record page. Might the boom in bitcoin and other digital currencies have something to do with the loss of confidence in money backed by nothing but faith? Increased money printing: yes, again at record levels.

What does the future hold?

It should come as no surprise that the public have flocked to precious metals, with the latest social-media driven rush to silver being perhaps the first of many warnings.

When inflation does hit in such a way that not even distorted CPI can disguise it, the small subset of the public who have invested in gold and silver have managed to preserve the majority of their wealth. The rest scrambled to secure any sort of hard asset with their rapidly-depreciating currency.