FOMC Sees Two Rate Hikes in 2023. Gold Didn’t Like It!

On Wednesday (June 16, 2021), the FOMC has published its newest statement on monetary policy . The statement was barely changed. The main alteration is that the Fed has ceased saying that “the pandemic is causing tremendous human and economic hardship across the United States and around the world”. Furthermore, with the CPI annual rate jumping to 5% in May, the US central bank acknowledged that inflation is not any longer “running persistently below this longer-run goal”. Hence, both modifications are slightly hawkish , as the Fed noticed an improvement in the epidemiological situation, as well as higher inflation. Bad news for gold.

However, the statement was only slightly changed, so the investors focused more on the accompanying dot-plot and Powell’s press conference instead. According to the fresh economic projections , the Fed forecasts higher GDP growth and higher inflation this year, as the table below shows.

As one can see, the FOMC expects that the GDP will soar 7% in 2021, compared to a 6.5% rise expected in March. They also assume that the pace of economic growth will be slightly higher in 2023. Meanwhile, the Fed officials believe now that the PCE inflation (core PCE) will jump to 3.4% (3%) this year , compared to 2.4% (2.2%) seen in March. They also forecast a slightly lower unemployment rate in 2022.

But the most impactful change occurred in the expected path of the federal funds rate . The FOMC members now forecast that the US policy rate will be 0.6% at the end of 2023, an important upward change from 0.1% projected in March. In other words, the US central bankers believe that two interest rate hikes will be appropriate in 2023 . It means that they started to think about tapering, which is fundamentally negative for gold prices.

Indeed, Powell said during his post-meeting press conference that we can “think of this meeting that we had as the talking about talking about meeting [at which the Fed will start tapering], if you like”.

Implications for Gold

What does the recent FOMC meeting imply for the gold market? Well, the Fed struck again. As a result, the price of gold plunged. As the chart below shows, the London P.M. Fix slid from about $1,865 on Tuesday to $1779 on Thursday.

The reason is simple : the fresh dot-plot shows that a majority of the Fed officials currently forecasts two quarter-point rate hikes in 2023 . 13 of 18 FOMC members see some interest rate increases in 2023 compared to just 7 members in March. Moreover, 7 participants now predict some upward moves next year. These changes lifted market expectations of future interest rates . In consequence, the bond yields increased, which raised the opportunity costs of holding non-yielding bullion . Furthermore, the more hawkish stance of the Fed strengthened the US dollar, creating downward pressure on gold prices. In other words, the new economic outlook revealed some hawks among the FOMC members and that there might be less tolerance toward higher inflation than previously thought.

However, the bullish case for gold is not over yet . After all, the Fed maintained its very accommodative monetary policy, and it will not hike interest rates this year and probably not also in 2022. Additionally, the dot-plot is not the official projection of the future path of the federal funds rate, so it should be taken with a grain of salt. A lot may happen by 2023. Also, the Fed leadership seems to be more dovish than many of the regional Fed presidents.

Last of all, Powell repeated that inflation is merely transitory. But why hike interest rates if inflation is merely transitory and federal debt is ballooning? Hence, it might be the case that the Fed is testing the markets. High inflation is still with us, and it may be more lasting than the Fed believes. Even with two interest rate hikes, the real interest rates should stay negative.

Having said that, the hawkish Fed’s statement and hawkish economic projections are fundamentally negative for the yellow metal in the medium term . The chances of a replay of 2013 have increased. It seems that gold may struggle without an inflationary turmoil, stagflation , the dovish counter-strike at the Fed, or a debt crisis .

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

Inflation Soars 5%! Will Gold Skyrocket?

Whoa! Inflation soared 5% in May – quite a lot for a nonexistent (or transitory) phenomenon! But let’s start from the beginning. The CPI rose 0.6% in May, after increasing 0.8% in April. Meanwhile, the core CPI, which excludes food and energy, soared 0.7%, following a 0.9% jump in April. So, given that the pace of the monthly inflation rate decelerated, we shouldn’t worry about inflation, right? Well… we should.

First of all, inflation was higher than expected , as the consensus forecast was a 0.4% increase. Inflation surprised pundits once again, but not me. Last month, I wrote in the Fundamental Gold Report that “Inflation escalated in April. In May, however, inflation could be softer, but it will remain relatively elevated, in my view” – and this is exactly what happened. However, the unexpected rise in inflation is positive news for gold, as such a surprise should decrease the real interest rates .

Second, pundits cannot blame energy prices for this jump, as the energy index was flat. Apart from energy and medical care services, which decreased slightly, all index components increased last month. In particular, the index for used cars and trucks soared again (7.3%). Also, the indexes for new vehicles and apparel surged in May, which shows that inflationary pressure is broad-based .

Last but definitely not least, the latest BLS report on inflation reveals that the overall CPI skyrocketed 5% for the 12 months ending May (before seasonal adjustment), followed by a 4.2% spike in April. For context, the annual inflation rate has been trending up every month since January, when the 12-month change was just 1.4%. Therefore, we’ve just seen the largest move since a 5.4% jump for the period ending in August 2008 , just one month before the bankruptcy of Lehman Brothers that triggered the global financial crisis and deflationary Great Recession .

But that’s not all! The annual core CPI rate soared 3.8% last month after rising 3% in April, as the chart below shows. It was the fastest pace since June 1992. So, the Fed cannot by any manner of means blame higher inflation on food or energy prices.

Supply disruptions are not a credible explanation either, as the inflation acceleration is broad-based. How likely would it be, that the production of virtually all goods and services would face supply bottlenecks at the same time and extent? Indeed, a significant boost in the broad money supply is a much more convenient explanation for widespread price increases.

Implications for Gold

What does accelerating inflation imply for the gold market? Well, on the one hand, higher inflation should be positive for the yellow metal , as it means a stronger demand for gold as an inflation hedge . Additionally, higher inflation could lower the real interest rates, also supporting gold prices. And indeed, the price of gold has risen from about $1,870 to $1,890 in a response to the inflation spike.

On the other hand, some analysts point out that stronger inflation could be rather negative for the yellow metal , as the Fed would have to tighten its monetary policy , taper its quantitative easing and hike the federal funds rate to contain inflation. After all, the overall CPI annual rate is more than twice as high as the Fed’s target. Moreover, the mediocre gold’s reaction to the surge in inflation suggests that investors are worried about a normalization of the ultra-dovish monetary policy .

However, the Fed has recently become more tolerant of higher inflation, and Powell is likely to continue claiming that inflation is merely transitory. Also, on Thursday, the European Central Bank held its regular monetary policy meeting and maintained its elevated flow of stimulus, even though recovery takes hold. And the Fed may do the same, i.e., nothing, tomorrow.

Nevertheless, the relaxed stance of the ECB and the Fed could come out as incorrect. We have the economy operating above potential, with big fiscal injections along with a very easy monetary policy. Such a combination could bring us to an environment of higher and more lasting inflation, which could disrupt the market later in the future.

After all, many indicators suggest that financial markets believe in the narrative of “transitory” inflation. But if inflation proves to be more permanent than expected, there could be some turmoil in the markets – and gold could benefit from it. Gold is not always a good inflation hedge, and it could suffer somewhat if the nominal interest rates increase; however, it should prosper if the real interest rates decline further.

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

Is Gold Really an Inflation Hedge?

Inflation has returned. This is partly understandable. After all, during the Covid recession , consumers and businesses accumulated a lot of cash as their spending was reduced, while revenues were sustained by money transfers from the government. These funds are now entering the economy, which makes demand grow much faster than supply, thus boosting prices. After some time, supply may catch up, curbing inflation. However, there is an important risk that inflation will turn out to be higher and/or more permanent than many analysts believe.

From the fundamental point of view, gold should benefit from higher inflation. But why? In theory, there are several channels by which inflation supports the yellow metal. First, the inflationary increase in the money supply makes all goods and services more expensive, including gold. Indeed, the scientific paper by Lucey and others finds a reliable long-run relationship between gold and the US money supply.

Second, gold is a real, tangible and rare good with limited supply that cannot be increased quickly or at will. These features make gold a key element during the so-called flight into real values or into hard assets, which happens when inflation gets out of control. In other words, gold is the ultimate store of value which proved to hold its worth over time , unlike paper currencies that are subject to inflation and lose their value systematically.

Third, inflation means the loss of purchasing power of the currency, so when the greenback depreciates quicker than its major peers, the dollar-denominated price of gold increases. Fourth, when inflation is unexpected or when the Fed remains behind the curve and doesn’t hike nominal interest rates , real interest rates decline, supporting gold prices.

Fifth, high inflation increases economic uncertainty, which increases safe-haven demand for gold . In other words, an outbreak of inflation introduces some turbulences and leads to portfolio rebalancing, thus increasing gold’s appeal as a portfolio diversifier . During inflation, bonds underperform, so gold’s attractiveness increases.

And last but definitely not least, gold is perceived as an inflation hedge . But is it really a good hedge against inflation? I analyzed this issue a few years ago – it would be nice to provide an update in light of more recent developments. So, let’s take a look at the chart below, which shows gold prices and CPI annual inflation rates.

As one can see, the relationship between these two series is far from being perfect. Actually, the correlation coefficient is significantly below zero (-0.41), which means that the correlation is negative ! It means that although there are certain long-term trends – for example, gold rallied during stagflation in the 1970s and entered a bear market during the disinflation period in the 1980s and 1990s – there is no positive relationship between the CPI annual percentage change and the price of gold on a monthly basis.

In other words, the data shows that gold may serve as an inflation hedge only in the long run , as gold indeed preserves its value over a long time (for example, in the period from 1895 to 1999, the real price of gold increased on average by 0.3% per year). It is a good choice for investors also when there is relatively high and accelerating inflation, usually accompanied by fears about the current state of the U.S. dollar and a lack of confidence in the Fed and the global monetary system based on fiat monies .

However, let’s not draw conclusions too hastily. The chart below also presents the CPI and gold – but this time both series are year-on-year percentage changes (previously we had gold prices, now we have annual percentage changes in these prices).

Have you noticed something? Yup, this time both series behave much more similarly . Indeed, the correlation coefficient is now positive (0.44). Hence, there is a positive relationship between gold and inflation although not always seen in absolute prices (but in changes in these prices), and not always seen in the CPI (as inflation has broader effects not limited only to consumer prices).

Summing up the above analysis, it seems justified to claim that gold could benefit from the current elevated levels of inflation, especially if it turns out to be more lasting than commonly believed. It will also be good for gold if the Fed remains dovish and tolerant of inflation surpassing its target significantly.

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

 

Will Gold Rally Continue in the Upcoming Months?

We left May in the rearview mirror, and as the chart below shows, it was the second positive month in a row for the yellow metal. Gold rose 7% last month – this is 12.3% since the local bottom on March 31, 2021 . The jump was driven mainly by inflation fears, a weak greenback and a decrease in real interest rates .

Hence, I was right: the second quarter has been so far much better for the shiny metal than the first one, in which it declined by 11%. Gold even jumped temporarily above $1,900 at the turn of May and June. Since then, it has been fluctuating around this level. All this means that the yellow metal fully recovered its Q1 losses, finishing last month virtually flat year-to-date.

Now, the key question is: what’s next for gold? Outlooks are, as always, divided. Some analysts point out that gold’s struggle to move decisively north above $1,900 amid all the increase in the money supply , public debt and inflation is disturbing and has bearish implications for the future. For instance, the French bank Société Générale still believes that we will see $2,000 per ounce by the end of the year, but its conviction towards this forecast has weakened. I have to admit – the lack of a stronger rally in gold is something I also worry about.

But on the other hand, some believe that gold is still in a long-term bull trend . For instance, the World Gold Council , in its latest Gold Market Commentary , points out that sentiment towards gold became more bullish in May , as net positioning on COMEX futures rose to its highest level since February. Moreover, not only gold ETFs recorded their first monthly inflows since January 2021, but also the highest ones since September 2020.

Furthermore , the WGC’s 2021 Central Bank Gold Reserves Survey reveals a slightly stronger conviction towards gold , as there is a growing recognition among central banks of gold’s performance during periods of economic crises . The report notes that 21% of central banks expect to increase their gold reserves within the next year (value relatively unchanged from last year’s survey) and that no central bank expects to sell gold this year – down from 4% in 2020.

Also, Commerzbank remains bullish on gold despite recent volatility . Although the German bank expects that the Fed will start tapering its quantitative easing by the fourth quarter, it’s forecasting rising inflation. As a result, nominal interest rates will stay below the inflation rate leaving real bond yields significantly below zero.

Implications for Gold

What does all this imply for the gold market? Well, there are both downside and upside risks for gold in the future . Possible drawbacks are the unwinding of the Fed’s bond-buying program and the new tightening cycle . Strengthening expectations of asset purchases tapering and normalization of the ultra-dovish monetary policy could trigger an increase in the interest rates and outflows from the gold market.

To the other group of factors, I would include higher inflation. After all, we have never seen such coexistence of dovish monetary policy and easy fiscal policy . Not surprisingly, investors started to worry about record-breaking inflation. As the chart below shows, market-based probabilities derived from options (calculated by the Minneapolis Fed , which computes probabilities from option prices) show that the previous expectations of the CPI annual rate above 3% over five years have significantly increased recently. Higher inflation would increase demand for gold as an inflation hedge and decrease real interest rates, supporting gold prices.

So, gold’s future depends on the Fed’s reaction to rising inflation , or whether or not investors will focus on nominal and real interest rates. If the US central bank stays behind the inflation curve, real interest rates will stay in the negative territory, supporting the price of gold. However, if the Fed tightens its monetary policy decisively, or if investors focus on rising nominal bond yields in a response to inflation, the yellow metal may go down.

To that point, the most recent changes in the Fed’s framework, comments from the FOMC members and disappointing data about the US labor market suggest that we are far away from any serious tightening. So, gold has room for moving higher.

Having said that, it seems that gold needs more negative events (or even a kind of financial crisis ) to rally decisively further . So far, the US economy remains in the boom phase and higher inflation doesn’t seem to significantly disrupt the functioning of the markets. Perhaps gold bulls will have to wait a bit longer until we move from reflation to stagflation . Today’s report on inflation and upcoming FOMC meeting could provide more clues about gold’s future – stay tuned!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

US Government Stimulus Went Wrong. How Will Gold React?

According to the recent BLS Employment Situation Report , total nonfarm payrolls rose by 559,000 in May, following disappointing increases of 278,000 in April, as the chart below shows. What is disturbing here is that this time the US economy also added significantly fewer jobs than expected – economists surveyed by MarketWatch forecasted 671,000 additions. Moreover, labor force participation and employment-population rates were little changed, remaining significantly below the pre-pandemic levels.

On the positive side, the unemployment rate edged down from 6.1% to 5.8%, as the chart above shows. However, even though the number of unemployed people fell considerably from its recent high in April 2020, it remains well above the level seen before the Covid-19 epidemic. In February 2020, 5.7 million Americans were without a job, while now it is 9.3 million. It means that the labor market is still far from recovery . Or, actually, given all the generous unemployment benefit supplements introduced during the pandemic, the new equilibrium unemployment rate may be simply higher than in the past.

Implications for Gold

Anyway, the new employment situation report is positive for the gold market . May nonfarm payrolls report is disappointingly weak and missed expectations for the second month in a row. It means that the April report wasn’t just an accident, and the US labor market has to face some serious problems.

The sad truth is that Americans don’t want to work. Even the decline in the unemployment rate was caused to a large extent by the drop in the labor participation rate, as workers just left the labor market. This fact explains why employers report worker shortages despite an army of a few million unemployed people. According to the recent Fed’s Beige Book , many companies have difficulties finding new employees, so they had to boost their wages to attract candidates:

It remained difficult for many firms to hire new workers, especially low-wage hourly workers, truck drivers, and skilled tradespeople (…) A growing number of firms offered signing bonuses and increased starting wages to attract and retain workers.

Even the BLS admitted that “rising demand for labor associated with the recovery from the pandemic may have put upward pressure on wages”. Indeed, wage increases accelerated to 2% in May year-over-year, up from just 0.4% in the previous month. They could add to the inflationary pressure or reduce companies’ margins and investments, reducing the pace of real economic growth. So, the jump in wages seems to be good for gold . Hence, the yellow metal could continue its long-term upward trend after the recent pullback below $1,900 (see the chart below).

Additionally, disappointing employment situation news will postpone tapering of the Fed’s quantitative easing . The weak nonfarm payrolls report gives a strong hand to the doves within the FOMC who don’t want to even start talking about talking about tapering. Hence, the US monetary policy should remain very dovish , with the real interest rates at ultra-low levels supporting gold prices . Indeed, the expected path of the federal funds rate , derived from the Fed Fund futures , has declined from the prior levels.

In other words, although May nonfarm payrolls report is an improvement when compared to April, the level of employment is still 7.6 million below its pre-pandemic peak. So, even if we see further improvement later this year (which is likely, as many states end the unemployment benefit supplements this month), it will take several more months to fully eliminate the slack in the labor market. The implication is clear: precious metals investors shouldn’t bet on a change in the Fed’s stance anytime soon. And as the yellow metal is very sensitive to tapering fears, this is positive news for gold bulls.

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. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today . If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

The Return of Inflation. Can Gold Withstand the Dark Side?

Last month, I wrote that “inflation is knock, knock, knockin’ on golden door”. I was wrong. Inflation didn’t knock, it broke down the door! Indeed, as the chart below shows, the core CPI surged 3%, while the overall CPI annual rate soared 4.2% in April – this is twice the Fed’s target!

Now, the question is whether this elevated inflation will turn out to be just “transitory”, as the Fed and the pundits claim, or become more permanent. On the one hand, given that April-May 2020 was the worst phase of the pandemic with the deepest price declines, the current high inflation readings are perfectly understandable, and we could see lower numbers later this year.

On the other hand, inflation may be higher and/or more persistent than many analysts believe . After all, the April reading came as a shock for them and even for the top US central bankers. For example, Richard Clarida, the Fed Vice-Chair, said: “I was surprised”. It shows that there is more in high inflation than just the base effect. Indeed, the CPI index with February 2020, i.e., the last pre-pandemic month as a base, has jumped 3.1% so far – lower but still significantly above the Fed’s target.

It shouldn’t be surprising given the surge in the broad money supply and increase in fiscal transfers to citizens. Incomes are higher and people are ready to spend their money. Stronger demand met with supply shortages, so the prices rose. And what is important, the increases are widespread: from commodities to used cars and houses.

However, there are a few important upside risks to inflation . First, a rise in wages. Although employment is far from the pre-epidemic level, entrepreneurs struggle to find workers. Therefore, they could be forced to increase wages to pull employees away from generous government benefits. If passed on, higher input costs would translate into higher consumer prices.

Second, a housing boom . Rising housing prices show that inflationary pressure is something more than just CPI inflation, and all this could drive shelter inflation higher. More importantly, though, as shelter dominates in the CPI basket, the official inflation would rise as a result.

Third, an increase in inflationary expectations. In May, the University of Michigan index that gauges near-term inflation expectations surged to 4.6%from 3.4% in April. What’s important, the index that measures inflation expectations for the next five years also rose – from 2.7% in April to 3.1% in May, which is the highest level in a decade. As the chart below shows, the market-based inflation expectations have also been surging recently.

This is a very important development, potentially even a game-changer. You see, inflation remained low for years partially because Americans didn’t expect high inflation. They used to see persistent inflation as a thing of the past. They had strong confidence in the Fed , believing that the US central bank would quickly intervene to prevent inflation.

However, that belief could go away now . The Fed’s new monetary framework and officials’ speeches clearly indicate that the US central bank has become more tolerant of higher inflation. The Fed has returned – just like in the 1970s – to focus on full employment and its “shortfalls” instead of deviations, forgetting that economies can become too hot as well as too cold.

Given the dominance of doves in the Fed – but also in the Treasury with Yellen as a Secretary – one can reasonably doubt whether or not the US central bank is ready to hike the federal funds rate in response to higher inflation. Just like in the years before the Great Stagflation , the Fed could decide that it’s better to live with inflation than bear the pain of combating it.

More importantly, such a fight would be challenging now, as the public debt is a few times higher.

As the chart below shows, the federal debt held by the public is now 100% of the GDP , four times larger than throughout the 1970s. Hence, the increase in interest rates would amplify fiscal deficits even more. To paint the perspective, April’s core CPI was the highest since 1982, when the Fed was trying to control inflation, and interest rates were double-digit. So, the government would be obliged to cut its expenditures, while the climate is rather to spend as much money as possible. Therefore, the Fed is under strong pressure not to tighten its monetary policy .

What does all this mean for the gold market? Well, when people question the willingness or ability of the government and central bank to tame inflation, they expect it to go higher, which increases the actual inflation and make it more persistent. Such a negative surprise, with inflation expectations unanchored, would make prices rise abruptly – but also the demand for gold as an inflation hedge would increase . Given the widespread economic repercussions and elevated uncertainty triggered by higher inflation – which is one of the biggest threats to this economic cycle – gold could gain as a safe-haven asset .

Of course, gold is not a perfect inflation hedge in the short term. If interest rates increase or the Fed tightens monetary conditions in response to inflation, gold may struggle. Actually, a start of normalization of the monetary policy could push gold downward, just as it happened in 2011.

However, given the current pretending that “there is no inflation” by the Fed, it’s likely that the US central bank won’t react promptly, remaining behind the curve. The delay in tightening could de-anchor inflationary expectations and trigger an inflationary spiral, pushing real interest rates down but also gold prices up.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter . Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

 

Gold Seems Stuck at $1900. Are Inflationary Fears Exaggerated?

Gold surpassed $1,900 at the end of May. However, it has been struggling since then to rally decisively above this level. Instead, the price of the yellow metal has been oscillating around this level, as the chart below shows.

Why is that and what does it mean for the gold market? Well, on the one hand, we could say that the yellow metal is in a normal pause during an uptrend. However, the lack of more aggressive price appreciation amid high inflation , ultra-loose monetary policy , depreciating dollar and super easy fiscal policy could be seen as disturbing.

From a fundamental perspective, the timid price behavior of gold could be explained by a sideways trend in real interest rates . Their lackluster movement, in turn, could have resulted from the downward correction in long-term inflationary expectations (blue line), as the chart below shows.

Investors’ inflation bets have lost some steam, starting a debate about whether expectations of inflation have already peaked. After all, it might be the case that inflation fears have been exaggerated and investors have overshot, as they often do. In addition, some of the FOMC members signaled that it could be a good idea to begin discussing tapering quantitative easing .

If this was really the peak of inflationary expectations, the news would be bad for gold, which is seen as a hedge against inflation . However, many analysts expect that inflation expectations have room for further rises and could reach levels close to 3%.

Implications for Gold

What does all this mean for the price of gold? Well, market-based inflationary expectations have recently declined, dragging the real interest down and restraining gold from moving upward. However, inflation worries won’t disappear anytime soon . After all, the PCE inflation , the favorite Fed’s inflation gauge, jumped 3.1% in April, beating the expectations. Even in the Eurozone, where price pressure is usually lower than in the US, the inflation rate rose from 1.6% to 2% in May, which is the highest level since October 2018.

Furthermore, consumer-based inflationary expectations jumped from 3.4% to 4.6% in May, so inflation worries are still around. They could increase the uncertainty and increase the safe-haven demand for gold . Although higher uncertainty could limit some spending, we should remember that households have accumulated more than $2 trillion in excess savings during the pandemic . So, inflation may be more lasting than many policymakers and pundits believe . If inflation doesn’t turn out to be merely transitory, gold could gain some fuel for the upward march.

Higher inflation implies weakened purchasing power of the dollar. If we add America’s growing public debt problem to constantly rising prices, the downward trend in the greenback could continue, supporting the price of gold.

Of course, only time will tell whether or not current inflation worries are justified. However, please note that the economy didn’t collapse last year due to a lack of liquidity but due to the Great Lockdown . The implication is that the Fed has increased money supply well above demand , injecting a lot of liquidity into the system.

The expansion in the Fed’s balance sheet and commercial banks’ credit (after all, this time not only the monetary base has jumped, but the broad money supply as well), combined with the Great Unlocking, generated a great inflationary wave that lifted all asset classes: from commodities, through equities, to cryptocurrencies , including crypto-memes like Dogecoin.

And it might be just a coincidence, but the Fed introduced a new monetary regime that is prone to higher inflation also during the last year. A cynical interpretation could be that the Fed knew very well that its last year’s monetary expansion could result in higher inflation.

Hence, inflationary expectations didn’t have to peak, and they could increase later this year supporting gold prices . Having said that, if inflation really turns out to be only transitory, the current situation wouldn’t be much different from 2011-2013, when gold prices struggled amid expectations of monetary policy tightening . Of course, the Fed is even more dovish now under Powell than under Bernanke or Yellen , but higher inflation would be an additional argument for a bull market in gold .

If you enjoyed today’s free gold report , we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today . If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

Biden Proposes $6 Trillion Budget. Will Money Flow Into Gold?

On Friday (May 28), the White House presented the President’s budget for the 2022 fiscal year that starts on October 1, 2021. Biden trumped Trump and proposed $6 trillion, over one trillion more than Trump in his last year’s proposal for $4.8 trillion. Furthermore, POTUS wants to raise government outlays to up to $8.2 trillion by 2031.

According to the White House, the proposed fiscal agenda will further increase the total federal debt-to-GDP ratio , from the current 129.1% to 136.9% by 2031. Meanwhile, the federal debt held by the public is estimated to rise from the current 100.7% to 108.5% of the GDP. The current level of the US public debt compared to the size of the economy is presented in the chart below.

Despite the increase, Janet Yellen , Treasury Secretary, said that “it is a fiscally responsible program”. Yeah, right. Of course, it’s true that real interest rates are very low, and therefore the debt service costs are bearable; but the interest rates could go up one day. And even when the bond yields are low, there is still the crowding out effect and other negative consequences, as higher government expenditures imply higher taxes and fewer resources for the private sector. Last but not least, the GDP has practically returned to the pre-pandemic level, so such big fiscal programs are clearly excessive and could add to inflationary pressure.

Implications for Gold

What does the budget for the next fiscal year mean for gold prices? Well, although Trump was trumped in the last elections, trumpism is still doing well. Here I’m referring to the fact that Trump started to balloon the government spending and fiscal deficits well before the pandemic . Then the coronavirus hit and the fiscal policy became even looser. And now President Biden raises the stake, widening the budget deficit and public debt despite the recovery from the economic crisis .

In the short term, it doesn’t have to be good news for gold. This is because big deficits and federal debt could exert upward pressure on the Treasury yields, resulting in higher interest rates, which would suppress the price of gold.

Also of importance is the fact that the 2021 fiscal year was a period with an unprecedented size of the fiscal stimulus. So, although Trump proposed ‘only’ $4.8 trillion of government spending and almost $1 trillion of deficit, the actual numbers were much bigger: $7.2 and $3.7 trillion, respectively. In contrast, Biden’s proposal sees the budget deficit worth ‘only’ $1.8 trillion. In relative terms, the fiscal deficit is projected to decline from the current 16.7% to 7.8%.

Of course, the actual numbers will probably be bigger than the White House’s projections. But still, when compared to the previous year, the fiscal policy will become tighteron a relative basis. However, the fiscal policy will remain ultra-loose; the fiscal deficits are never assumed to decline below $1.3 trillion or 4.2 percent of the GDP, and the public debt is projected to reach a level not seen since World War II.

However, the Fed is ready to intervene if the interest rates increase too much. And, at some point, the current ‘debt elephant’ will become too big to pretend it’s not present in the room. The current policy mix of ultra-loose monetary policy and ultra-loose fiscal policy (despite the economic recovery) is unprecedented and raises the risk of a debt crisis in the more distant future. It seems that some policymakers are starting to notice that, as they switched their narrative from “debt is no problem” to “we have to pay for it through raising corporate taxes”. We can see that even in the White House’s document, as it factors in an increase in the corporate tax rate from 21% to 28%.

Hence, the continuation of the US’s irresponsible fiscal policy could add to the positive momentum in the gold space, especially while taking into consideration that all these new social and infrastructure programs arrive during a period of economic expansion and inflationary pressure. So, the era of big government (with bigger government expenditures and fiscal deficits) and higher inflation is back. It could be, thus, an era of shining gold.

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

Will Gold Shine Under Bidenomics?

Biden’s triumph in the presidential election does not just mean that a new man lives in the White House. It actually implies a fundamental shift in economic policy . Some analysts even see Biden’s agenda as a decisive break with neoliberalism or “Washington consensus”.

You see, in the old orthodoxy, most economists trusted in markets, argued for privatization, deregulation, and liberalization. Taxes and social benefits should be low and don’t discourage work and investments. The governments should run balanced budgets, avoiding large and permanent fiscal deficits , while central banks should hike interest rates to prevent inflation from running out of control.

The focus was on scarcity and limited supply. The economy was believed to operate generally at potential, so the key factors to fast economic growth were structural reforms and adequate supply-side policy to strengthen incentives to work and invest. Governments shouldn’t run fiscal deficits as they could crowd out private investments, and they shouldn’t stimulate the demand as it would misallocate resources and could overheat the economy, leading to inflation. The monetary policy was better suited to occasionally fight economic crises .

How much has changed! Now, the focus is on slack and the demand side of the economy. The growth is held by chronic lack of demand – this is the key tenet of Keynesian economics, the hypothesis of secular stagnation, and the Modern Monetary Theory – so, governments and central banks should continuously stimulate the economy through easy monetary and fiscal policies . As real interest rates are low and demand is weak, rising public debt is not a problem. Inflation is not a problem either; after all, if there is always slack in the economy which operates below its full potential, there is practically no risk of inflation.

Indeed, Biden has pushed the American Rescue Plan Act of $1.9 trillion (or about 9%of the GDP ) without presenting any plan of longer-term deficit reduction. And additional huge government expenditures are coming with Biden’s infrastructure plan. It seems that no one is interested any longer in how the government is going to pay for its spending and obligations, or in long-term consequences of practically unprecedentedly large fiscal deficits (see the chart below). Interest rates are low, so let’s live like there’s no tomorrow!

Another notable example is, of course, the Fed’s new monetary framework. The US central bank has ultimately disregarded the idea of the Philips curve and the natural rate of unemployment . There is no level of employment that could boost the inflation rate, so there is no need for any preventive actions. What really counts is the actual inflation rate, not the expected one. The central bank shouldn’t fight with symmetrical deviations from the economy’s long-term path determined by technological progress and other supply-side factors any longer, but only with shortfalls from the full employment.

So, what does Bidenomics (and Powellomics) imply for the gold market? Well, Biden is not the first politician who thinks that there are no economic limits to his ideas. But the pandemic and the economic crisis, the environment of ultra-low interest rates, and the fact that the Democratic base has shifted further to the left implies that Bidenomics may become a radical departure from sound economics. However, a crazy idea that “borrow & spend without a limit” is the key to prosperity is positive for the gold market , as the yellow metal is a safe-haven asset and a hedge against insane economic policies.

What is important here is the fact that we have actually tested this approach. In 1960, just like today, the Keynesian economists who dominated in the mainstream (and politicians who trusted them) thought that the main task of economic policy is to actively and permanently stimulate aggregate demand. The result was stagflation in the 1970s, as it turned out that economies may overheat as well. Gold shined then, so it should also benefit today from similarly unsound economic ideas and policies.

So far, the pace of economic recovery has been fast, while the inflation rate has remained limited. But this may change quickly when people stop trusting that the Fed and the government will swiftly take action to contain inflation if it breaks out. However, given the current mindset and macroeconomic ideas, how probable is it that the policymakers will accept substantial interest rate hikes, cuts in spending, and probably also a recession when faced with 1970s-style inflation? Not very likely, indeed. Hence, if inflation continues to rise, while the Fed remains ultra- dovish , inflationary expectations may become unanchored, and inflation may get out of control taking gold with it on a wild journey north.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter . Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

 

Gold Surpasses $1,900. What’s Next?

Gold bulls have an opportunity to celebrate. As the chart below shows, the price of gold has been rising recently. And yesterday (May 26) it finally jumped above $1,900, which is an important psychological level.

Today is moving just below that reference but the question we should ask now is “what’s next?” Well, as the jokes go on, the price of gold will either go up or down. But in earnest, there are significant downside risks for the yellow metal. First of all, the Fed could overreact to rising inflation and increase real interest rates .

However, these worries seem to be overblown. The Fed’s monetary policy is always asymmetrical, i.e., it eases its stance in response to recession more than it tightens it in response to inflation. The federal funds rate gets lower and stays at these low levels for longer, partially because of all the enormous indebtedness of the contemporary economy.

The tapering is surely the risk that looms on the horizon. But the Fed will maintain its quantitative easing and zero-interest-rate policy for at least the rest of 2021. So, there is still room for gold to move further north , especially after the recent turmoil in the cryptocurrency market resulting in renewed confidence in gold as an attractive inflation hedge .

After all, the US monetary policy is loose, and real interest rates are still in negative territory. The fiscal policy remains very easy, and the public debt is high. Inflation is huge and rising. And there is also an issue of depreciation of the greenback . The Fed’s easy stance, low interest rates and high inflation weaken the US dollar, supporting gold prices.

Last but not least, the level of risk appetite/confidence in the Fed and the economy has already reached its peak, as the GDP has recovered with an unprecedentedly high pace of growth. In other words, the post- pandemic euphoria is behind us – now the harsh, inflationary reality sets in. Maybe we won’t repeat the 1970s stagflation , but inflation is probably more deeply embedded than the Fed thinks. And it seems that the markets are finally getting this idea, pushing some investors into gold’s warm and shiny embrace .

Implications for Gold

What does it all mean for gold prices? Well, recently two broad trends have dominated the markets: rising inflation expectations and rising economic confidence. In other words, market participants expected reflation . However, economic confidence has peaked, and now investors focus more on inflation. So, we are moving slowly from the reflation phase to the inflationary phase, which is beneficial for gold – if this trend continues, the yellow metal could continue its upward march.

Every investor should remember one great historical pattern, basically as old as the Roman Empire. The money supply is first aggressively boosted with the excuse that “there is no inflation”. When upward pressure on prices becomes clear, that excuse transforms into “inflation is transitory” or into “the rise in inflation is caused by idiosyncratic factors”. Have you heard about Arthur Burns, the Fed Chair in the 1970s and the predecessor of Paul Volcker ? As Stephen Roach notes on him:

Over the next few years, he [Burns] periodically uncovered similar idiosyncratic developments affecting the prices of mobile homes, used cars, children’s toys, even women’s jewelry (gold mania, he dubbed it); he also raised questions about homeownership costs, which accounted for another 16% of the CPI. Take them all out, he insisted!

Finally, the officials admit that there is inflation, but they blame it on speculators and other external, unfavorable or even hostile factors. To be clear, I’m not predicting hyperinflation or even double-digit inflation in the US, but recent economic reports suggest that upward price pressure could be more lasting than the Fed and the pundits believe.

So, inflation could remain elevated for a while , especially given that the description of Burns downplaying it is worryingly similar to the current Fed’s stance under Powell . As Stephen Roach points out, the current size of fiscal and monetary stimuli is unprecedented, especially taking into account the pace of the recovery:

Today, the federal funds rate is currently more than 2.5 percentage points below the inflation rate. Now, add open-ended quantitative easing – some $120 billion per month injected into frothy financial markets – and the largest fiscal stimulus in post-World War II history. All of this is occurring precisely when a post-pandemic boom is absorbing slack capacity at an unprecedented rate. This policy gambit is in a league of its own.

Indeed, but gold loves chess, gambits included. After all, chess is a royal game, while gold is a royal metal!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

Rising Cost Pressure – What Will Mr. Powell and Mr. Gold Do?

On Friday, the recent IHS Markit Flash U.S. Composite PMI has been published . There are two pieces of news for gold – one good and one bad. Let’s start with the negative information. The report signals an unprecedentedly fast expansion in business activity in May . Indeed, the composite index surge from 63.5 in April to 68.1 this month established a new record.

More importantly, both manufacturing and services sectors’ markets have shown strong growth. The former index rose from 60.5 in April to 61.5 in May (also a new record), while the PMI for services soared from 64.7 to 70.1, marking the sharpest jump since data collection for the series began in October 2009. Such an unprecedentedly fast acceleration of growth in the PMI signals strong economic growth, which is clearly bad news for the safe-havens such as gold (however, strong economic growth is something everyone expected, so it might be already priced in as well).

The good information is, however, that at least part of this growth is inflationary , as soaring demand greatly improved the firm’s pricing power. And the input costs have surged, leading to the sharpest rise in output charges since the end of the Great Recession when the data collection started:

Increasing cost burdens continued to be keenly felt, as the rate of input price inflation soared to a new survey record high, often linked to a further marked worsening of supplier performance. Commonly noted were increases in PPE, fuel, metals and freight costs amid significant supplier delays.

The steep rise in costs fed through to the sharpest increase in output charges since data collection began in October 2009, with record rates of inflation registered for both goods and services as soaring demand boosted firms’ pricing power.

What’s more, wage inflation is also coming , as the report says that entrepreneurs couldn’t find people to fill the vacancies. It seems that generous benefits introduced in a response to the recession discouraged people from searching for work, and slack in the labor market is greatly exaggerated.

Although a solid expansion in staffing levels eased some pressure on backlogs in the service sector, manufacturers registered the fastest rise in work-in-hand on record amid raw material shortages. While job creation was again seen in the goods-producing sector, the rise was the slowest for five months, linked in part to difficulties filling vacancies.

In other words, the post-pandemic natural employment will be simply lower because of the institutional changes, not because of weak aggregate demand. How would you explain otherwise the fact that entrepreneurs cannot find workers amid employment lower by 8 million when compared to the pre-pandemic level?

But this is good news for gold. The subdued employment would be a great excuse for the Fed to say that there is slack in the labor market, the aggregate demand is weak, and the economy remains fragile and below the Fed’s targets, so it still needs easy monetary conditions. Hence, Powell would stay passive and would even avoid starting to think about tapering the quantitative easing and hiking interest rates . Dovish Fed and rising prices would support gold prices.

So, high inflation (see the chart below) should remain with us for a while . Indeed, manufacturers worry that raw material shortages “could extend through 2021” and producer price inflation translates into consumer price inflation with a certain lag. Anyway, high inflation won’t disappear in one or two months, but it could last for at least a few or even several months if the Fed remains ultra- dovish and people lose confidence in the central bank’s ability to maintain price stability.

If this scenario happens, inflation expectations could cease to be “well-anchored” and inflation could get out of control, just as it did during stagflation in the 1970s. Chris Williamson, Chief Business Economist at IHS Markit, seems to agree with me in his comment on the report:

The May survey also brings further concerns in relation to inflation, however, as the growth surge continued to result in ever-higher prices. Average selling prices for goods and services are both rising at unprecedented rates, which will feed through to higher consumer inflation in coming months.

Implications for Gold

What does the recent IHS Markit Flash U.S. Composite PMI imply for gold? Well, strong economic activity is bad for gold, given that it usually shines during bad times. However, the yellow metal doesn’t like genuine, real growth, but it performs pretty well during inflationary periods . Of course, part of the growth comes from the reopening of the economies, but there is no doubt that this expansion is accompanied by high inflation.

I’ve been warning readers since the very early part of the pandemic that the following expansion will be more inflationary than the previous one. This is excellent news for gold, which entered a bear market in 2011-2013 (i.e., when the former expansion settled down). What’s important here is that the economic environment is more inflationary (we have easier monetary and fiscal policies ) while at the same time the Fed is highly tolerant of high inflation – this is a truly dangerous cocktail, but it could be quite tasty for gold.

If you enjoyed today’s free gold report , we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today . If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

Will Bitcoin Replace Gold?

Today we will talk in general as a long term investment, ignoring the recent Bitcoin selloff to 30.000$ levels.

As the chart below shows the price of the first and the biggest of cryptocurrencies rose to above $60,000 in April 2021 from scratch (or $124) in October 2013 when the chart starts. I wish I had bought more coins in these early years of cryptocurrencies and held them for longer! More recently, Bitcoin has skyrocketed almost 1200% from its bottom of $4,945 during the asset sell-off in March 2020.

OK, but why am I writing about Bitcoin in the Gold Market Overview? The reason is the narrative that the cryptocurrency has already become or will become soon the substitute for gold. Some people even call Bitcoin “new gold” or “millennial gold”. And this is what Jerome Powell has recently said about cryptocurrencies:

Crypto assets are highly volatile and therefore not useful as a store of value. They are not backed by anything. It is a speculative asset that is essentially a substitute for gold rather than for the dollar.

Others echo Powell’s remarks, claiming that Bitcoin is displacing gold as an inflation hedge , or that it could supplant gold as a safe-haven asset . Are they right?

Well, there are, of course, some similarities between Bitcoin and gold which make these two assets substitutes to some extent . It would be surprising if that wasn’t the case, given the fact that Bitcoin’s system was designed to mimic the gold standard . In particular, there is a cap on the number of bitcoins to make this cryptocurrency rare just like the yellow metal. In other words, the idea is to make its supply inflexible, just as – or even more – in the gold standard. So, both Bitcoin and gold are anti-inflationary currencies whose supply cannot be arbitrarily changed like in the case of national fiat currencies . And both these assets have a libertarian, anti-government flavor – in the sense that demand for them stems from the lack of confidence in the government monies.

However, there are also important differences between Bitcoin and gold. First of all, although Bitcoin is believed to be an alternative anti-fiat asset, it’s actually also fiat money . It’s a private, decentralized, non-governmental currency, but it doesn’t change the fact that Bitcoin is not backed by anything, and it has no intrinsic value. Of course, value is subjective, but gold has some non-monetary use (in jewelry or technology), which implies that its price is not likely to drop to zero in a worst-case scenario in which people cease to see gold as a monetary asset. Unlike the shiny metal, Bitcoin has only monetary value – i.e., you cannot use it either as a consumer good or as an input in a production process – so there is no floor below its price (if the officials try to ban Bitcoin, its price could plunge really deeply).

Second, Bitcoin is much more volatile than gold . Sure, it might be just a problem of Bitcoin’s young age. But it doesn’t change the fact that price declines in the cryptocurrency are a few times bigger than in the gold market. Hence, although – thanks to the network effects and speculative appeal – Bitcoin offers potential for quicker and larger gains, it’s also associated with higher downward risks. It makes the cryptocurrency an inferior store of value and a safe haven. So, Bitcoin could be seen rather as a risky asset, not necessarily a safe haven that goes up together with risk appetite. This may explain the recent divergence in cryptocurrencies and gold.

What does it all mean for the gold market ? Well, it’s true that some money has flowed from gold into Bitcoin and that some investors may prefer now to treat Bitcoin as a major alternative asset in their investment portfolios . However, such flows and rebalancing of portfolios as we’ve seen recently are perfectly normal, especially given that Bitcoin is still benefiting from the network effects, i.e., the accelerating institutional interest and mainstream acceptance.

More importantly, there are important differences between gold and Bitcoin, which imply that the latter won’t replace the yellow metal . The correlation coefficient between the weekly prices of these two assets is only 0.38 percent, so they are really far away from being perfect substitutes. Also, please take a look at the chart below which shows their prices in 2019-2021.

As you can see, gold reached its peak in early August, while the rally in the cryptocurrency started in October, two months later. Hence, it should be clear that Bitcoin didn’t cause the plunge in gold prices . We could even hypothesize that gold has undergone (or is undergoing) a healthy correction, which is still ahead of Bitcoin. After all, its price chart looks parabolic, which brings to mind the possibility of a bubble (although network effects can be partially responsible for this shape).

Anyway, for us, these two assets are rather distinct despite all the similarities. And they both can coexist together as hedges against national fiat currencies, as they complement each other. Bitcoin can be used in instant payments, cross-border payments and as a highly risky speculative asset, while gold has non-monetary value and provides long-term stability. But Bitcoin’s rise in popularity doesn’t pose an existential threat to gold. After all, the yellow metal has an exceptional track record of being the ultimate money, proving its value over millennia .

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter . Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

 

Gold Approaches $1,900 amid FOMC Minutes and Crypto Sell-Off

Yesterday, the FOMC published minutes from its last meeting in April . They’ve shown two things doing that: first, that some of the central bankers are worried about the inflation and elevated asset valuations; and, second, that the Fed is going to remain dovish despite all these concerns .

Indeed, some FOMC participants noted that the demand for labor had started to put some upward pressure on wages. Moreover, a number of them pointed out the protracted supply disruptions and the insufficient pre-emptive hawkish reaction from the Fed as potentially inflationary factors:

A number of participants remarked that supply chain bottlenecks and input shortages may not be resolved quickly and, if so, these factors could put upward pressure on prices beyond this year. They noted that in some industries, supply chain disruptions appeared to be more persistent than originally anticipated and reportedly had led to higher input costs. (…)

A couple of participants commented on the risks of inflation pressures building up to unwelcome levels before they become sufficiently evident to induce a policy reaction.

When it comes to financial stability and asset valuations, several FOMC members pointed out elevated risk appetite and very low credit spreads . And certain participants noted dangers related to the low interest rates and excessive risk-taking: if the risk appetite fades, the asset prices could decline with potentially harmful consequences for the financial sector and the economy:

Regarding asset valuations, several participants noted that risk appetite in capital markets was elevated, as equity valuations had risen further, IPO activity remained high, and risk spreads on corporate bonds were at the bottom of their historical distribution. A couple of participants remarked that, should investor risk appetite fall, an associated drop in asset prices coupled with high business and financial leverage could have adverse implications for the real economy. A number of participants commented on valuation pressures being somewhat elevated in the housing market. Some participants mentioned the potential risks to the financial system stemming from the activities of hedge funds and other leveraged investors, commenting on the limited visibility into the activities of these entities or on the prudential risk-management practices of dealers’ prime-brokerage businesses. Some participants highlighted potential vulnerabilities in other parts of the financial system, including run-prone investment funds in short-term funding and credit markets. Various participants commented on the prolonged period of low interest rates and highly accommodative financial market conditions and the possibility for these conditions to lead to reach-for-yield behavior that could raise financial stability risks.

So, given all these concerns about financial stability and higher inflation, the Fed should send some hawkish signals, right? Not at all! On the contrary, the US central bank reiterated its ultra-dovish stance, justifying that the economy was far from achieving full employment.

Participants commented on the continued improvement in labor market conditions in recent months. Job gains in the March employment report were strong, and the unemployment rate fell to 6.0 percent. Even so, participants judged that the economy was far from achieving the Committee’s broad-based and inclusive maximum-employment goal. Payroll employment was 8.4 million jobs below its pre-pandemic level. Some participants noted that the labor market recovery continued to be uneven across demographic and income groups and across sectors.

After all, higher inflation would only be transitory, and when these short-term factors fade, inflation will decrease:

In their comments about inflation, participants anticipated that inflation as measured by the 12-month change of the PCE price index would move above 2 percent in the near term as very low readings from early in the pandemic fall out of the calculation. In addition, increases in oil prices were expected to pass through to consumer energy prices. Participants also noted that the expected surge in demand as the economy reopens further, along with some transitory supply chain bottlenecks, would contribute to PCE price inflation temporarily running somewhat above 2 percent. After the transitory effects of these factors fade, participants generally expected measured inflation to ease. Looking further ahead, participants expected inflation to be at levels consistent with achieving the Committee’s objectives over time (…) Despite the expected short-run fluctuations in measured inflation, many participants commented that various measures of longer-term inflation expectations remained well anchored at levels broadly consistent with achieving the Committee’s longer-run goals.

Yeah, sure, but why should we believe the Fed if they were surprised by the CPI readings in April? They anticipated inflation moving above 2 percent, and meanwhile the CPI inflation surged above 4 percent as the chart below shows!

But at least inflation expectations remain well-anchored, don’t they? Well, not exactly . As the chart below shows, the market-based expectations of inflation have significantly risen recently. Similarly, the University of Michigan’s index that measures inflation expectations for the next five years rose from 2.7 percent in April to 3.1 percent in May – it’s the highest level in a decade.

Interestingly, even the Fed staff doesn’t believe in transitory inflation. After all, they forecast that the actual GDP would be above its potential until 2022-2023:

With the boost to growth from continued reductions in social distancing assumed to fade after 2021, GDP growth was expected to step down in 2022 and 2023. However, with monetary policy assumed to remain highly accommodative, the staff continued to anticipate that real GDP growth would outpace that of potential over much of this period, leading to a decline in the unemployment rate to historically low levels.

Economics 101 teaches us that when the economy operates above its potential, it implies overheating and inflation that reflects more fundamental or lasting factors than base effects and short-term supply disruptions.

Implications for Gold

What do the recent FOMC minutes imply for gold? Well, the Fed remaining dovish despite all the inflationary risks and elevated asset valuations (many assets plunged yesterday, especially cryptocurrencies) is bullish for gold .

Sure, a few members became ready to start talking about tapering the quantitative easing and tightening the monetary policy :

A number of participants suggested that if the economy continued to make rapid progress toward the (policy-setting) Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.

However, “a number” is not “the majority”, so we shouldn’t expect such a discussion in the mainstream anytime soon, especially in light of the disappointing April nonfarm payrolls and recent declines in the stock market.

The price of gold rose yesterday, approaching $1,900. It might have been due to the FOMC minutes, but also the sell-off in cryptocurrencies and the following outflow of money from them into old, good gold.

Given these shifts in the marketplace, it seems that Fed’s worries about fading risk appetite were justified. If risk appetite wanes further, gold should shine as a safe-haven asset .

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. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today . If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

Gold Rebounds After Fainting Due to Inflation Spike

Gold rebounded after an initially bearish reaction to the BLS report showing that inflation soared 4.2% in April year-to-year. This means we have an inflation annual rate doubling the Fed’s target and the highest since the Great Recession as the chart below shows.

It might now seem counterintuitive, but traders worried that the jump in the CPI would force the Fed to tighten its monetary policy earlier than anticipated. However, it seems that the US central bank managed to convince the markets that it would remain dovish for a very long period and that April’s inflation reading wouldn’t accelerate the first hike of the federal funds rate .

Indeed, on Thursday, Federal Reserve Governor Christopher Waller said that the Fed would need “several more months of data” before considering modifications to its stance. He added “now is the time we need to be patient, steely-eyed central bankers, and not be head-faked by temporary data surprises.” So, don’t fight the Fed, interest rates will stay at zero for several months, thus supporting the yellow metal!

After all, the Fed’s narrative is that the current inflation is transitory . Of course, the April surge was partially caused by a 10% increase in the cost of new, as well as used cars and trucks – this accounted for a great part of the overall rise. Interestingly enough, the massive spike in car prices was in part generated by temporary supply-chain disruptions, i.e., the shortage of microchips used in automobile production.

However, one can almost always find an element without which inflation is smaller. But one can also almost always find an element without which inflation is higher. This is how the consumer baskets work: some goods are getting more expensive, others are getting cheaper, etc.

So, although May’s inflation reading will likely be smaller, inflation may be more lasting than many analysts believe. There are many arguments for this. First, the surge in the broad money supply . Second, rising producer prices in China, so there might be an import of inflation. Third, the realization of the pent-up demand. Fourth, the rising input prices and more room for passing them on consumers. Fifth, April’s sluggish job creation signals that wages will have to rise to entice people to return to work (all the recent unemployment benefits have made current wages less appealing). So, producers could try to pass these increases in wages on consumers, just as with rising input prices.

Implications for Gold

What does inflation imply for the gold market? Well, from the fundamental perspective, higher and more permanent inflation is positive for the yellow metal . Inflation lowers the real interest rates and the purchasing power of the greenback , supporting gold. Of course, the short-term relationship between inflation and gold is more complicated (and less bullish than in theory), especially when higher inflation translates into higher nominal bond yields and expectations of a more hawkish Fed .

However, gold is a proven long-term hedge against inflation , so “gold can be a valuable component of an inflation-hedging basket”, as the WGC’s Investment Update shows . What is important here is that the Fed has become more tolerant of higher inflation. Therefore, we will have an environment of higher inflation and dovish Fed behind the curve, which implies lower real interest rates and a weaker dollar.

Hence, gold should attract attention as a hedge against inflation – actually, it’s already happening, as market sentiment toward gold has recently improved, while outflows in gold ETFs have slowed . And, as the chart below shows, the price of gold has jumped this week above $1,850.

So, as I repeated several times earlier, although the threat of higher interest rates will remain, the second quarter of 2021 should be better than the first one, unless the Fed radically changes its stance.

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. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today . If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

Inflation Monster Rears Its Ugly Head. Will Gold Beat It?

Unbelievable! The “non-existent” inflation keeps getting stronger. The CPI increased 0.8% in April , after rising 0.6% in March. The pundits cannot blame energy prices for this jump, as the energy index decreased slightly. This shows that the surge in inflation wasn’t caused just by the base effect. Apart from energy, all major component indexes increased last month. In particular, the index for used cars and trucks rose 10.0%, which was the largest monthly increase since the series began in 1953.

As a result, the core CPI, which excludes food and energy, soared even stronger in April, i.e., 0.9%, following a 0.3% jump in March. It was the largest monthly increase since April 1982. But still, there is no inflationary pressure in the economy…

And now for the best part, the true crème de la crème of the recent BLS report on inflation : As the chart below shows, the overall CPI surged 4.2% over the 12 months ending in April , while the core CPI jumped 3.0%. These annual rates followed, respectively, 2.6% and 1.6% increases in March.

So, there was a huge acceleration in inflation last month! The last occurrence of such high inflation was in 2008 during the Great Recession . The quickening was a surprise for many analysts, but not for me. When analyzing the March CPI report , I wrote that it wasn’t an outlier:

“What’s important is that the recent jump in inflation is not a one-off event. We can expect that high inflation will stay with us for some time, or it can accelerate further next month.”

And indeed, inflation escalated in April. In May, however, inflation could be softer, but it will remain relatively elevated, in my view.

Implications for Gold

What does the hastening in inflation imply for the precious metals market? Well, the London P.M. Gold Fix has barely moved, as the chart below shows. What’s more, the New York spot gold prices have decreased in the aftermath of the April report on the CPI.

What happened? Shouldn’t gold have reacted more positively to the surprising speeding up of inflation? As an inflation hedge – it should. But this is far more complicated. First, the bond yields have increased to reflect higher inflation, as traders started to bet that the Fed would have to hike interest rates faster than previously expected.

But the April CPI report won’t force the U.S. central bank to alter its monetary policy and adopt a more hawkish line . After all, they expected acceleration in inflation, and they will simply describe it as a transitory development. As a reminder, the Fed focuses now more on the labor market than price stability – and with employment still more than 8 million short of the pre-pandemic level, the Fed will likely maintain its dovish stance .

Indeed, Fed Vice Chair Richard Clarida reiterated that the U.S. central bank is far away from tightening its monetary policy and confirmed that higher inflation than anticipated won’t alter the Fed’s course, as it would prove to be temporary:

The economy remains a long way from our goals, and it is likely to take some time for substantial further progress to be achieved (…) This is one data point, as was the labor report (…) We have been saying for some time that reopening the economy would put some upward pressure on prices.

What’s more, although traders focused initially on the implications of higher inflation on the federal funds rate and the U.S. monetary policy, in the longer-term gold should come into more favor as a hedge against higher inflation or even stagflation – after all, in April, we witnessed surprisingly disappointing nonfarm payrolls and a surge in inflation. Of course, single reports are not enough, but inflationary risks have definitely risen recently, and we could see some portfolio rebalancing toward gold later this year.

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. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today . If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

Gold Jumps above $1,800. What’s Next?

The gold market is a funny place. On Thursday (May 6), I complained that the yellow metal couldn’t surpass $1,800:

The price of gold has been trading sideways recently as it couldn’t break out of the $1,700-$1,800 price range. This inability can be frustrating, but the inflationary pressure could help the yellow metal to free itself from the shackles.

And voilà, just later that day, the price of gold finally jumped above $1,800, as the chart below shows. Hey, maybe I have to complain about gold more often?

But jokes aside. The move is a big deal, as gold has finally broken above the key resistance level. What’s important here is that the breakthrough wasn’t caused by some negative geopolitical or economic shock, but rather by fundamental and sentiment factors.

So, what happened? First, there is a weakness in the US dollar . With global economic recovery progressing, the safe-haven appeal of the greenback is simply vanishing. Another issue here is – and I pointed this out in the Fundamental Gold Report dedicated to the latest ECB’s meeting – that the pandemic in the Eurozone has reached its peak. So, the worst is already behind the euro area, and it can catch up with the US now, supporting the euro and gold against the dollar.

Second, the bond yields have been heading lower recently . As one can see in the chart below, the real interest rates have corrected significantly since their peak in March. In early May, the 10-year TIPS yields slid further, returning to almost -0.90 percent.

What is noteworthy here, the real interest rates declined more than the nominal interest rates. It resulted from the increase in the expected inflation. Indeed, as the chart below shows, the 10-year breakeven inflation rate jumped in early May . As a reminder, I wrote on Thursday that “the inflationary pressure could help the yellow metal to free itself from the shackles” and this is exactly what happened.

Implications for Gold

What does gold’s jump above $1,800 imply for its future? Well, the crossing of an important obstacle is always a positive development. The decline in the interest rates, coupled with the weakness in the US dollar, means that the markets are convinced that the Fed would remain very dovish, even despite the rising inflation .

Other positive news for the gold market is April’s nonfarm payrolls that came in below the forecasts. The US economy added only 266,000 jobs last month (see the chart below), although many analysts and even the FOMC members expected a nearly 1 million increase in employment. Such a disappointment made traders slash the bets on the pace of the Fed’s monetary tightening. A softer expected path of the federal funds rate is a fundamentally positive factor for gold.

In other words, the weak employment report relieves a lot of the pressure put on the Fed to tighten its monetary policy. So, the US central bank will continue to provide monetary support, despite all the progress observed in the economy, and that easy stance will stay with us for longer than previously expected. In that sense, April’s disappointing jobs data may be a game-changer for gold, and it could add fuel to the recent rally that started on Thursday.

Of course, one weak employment number doesn’t erase the impressive economic recovery. Moreover, I would like to see that gold hold the recent gains through the coming days before organizing a party for the gold bulls. However, it seems that I was right in saying that the second quarter would be much better than the first one. Gold is indeed gaining momentum! And, what’s really important, the yellow metal started to rise amid a strong economic recovery – it implies that we can be observing important, bullish shifts in the market sentiment towards gold.

If you enjoyed today’s free gold report , we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today . If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

Inflation Knock-knock-knockin’ On Golden Door

“Knock, knock, knockin’ on heaven’s door”, so sing Bob Dylan and Guns N’ Roses. Now, inflation is knocking on the golden door. According to the BLS , the U.S. CPI inflation rate recorded a monthly jump of 0.6% in March, while soaring 2.6% on an annual basis. And the core inflation has also accelerated. So, inflation has significantly surpassed the Fed’s target of 2% , as one can see in the chart below.

And remember that this is what the official data shows, which rather underestimates the true inflation. This is because of several issues, including hedonic quality adjustments, shifts in the composition of the consumer baskets and methodological changes. It is enough to say that the rate of inflation calculated by the John Williams’ Shadow Government Statistics that uses methodology from the 1980s is over 10% right now.

There are some controversies about this alternate data, but I would like to focus on something else. The CPI doesn’t include houses (or other assets) into the consumer baskets, as they are treated as investments. The index only takes rents into account. But homeowners don’t pay rents, so for them, the cost of shelter, which accounts for about one-fourth of the overall CPI, is the implicit rent that owner-occupants would have to pay if they were renting their homes. And this component rose just 2 percent in March, while the Case-Shiller Home Price Index, which measures the actual house prices, soared more than 11% in January (the latest available data). According to Wolf Street , if we had replaced the owners’ equivalent rent of primary residence with the Case-Shiller Index, the CPI would have jumped 5.1 instead of 2.6%. The chart below shows the difference between these two measures.

Hence, inflation has come, and even the official data – which can underestimate the level of inflation that ordinary people deal with in their daily lives – confirms this. If you’ve been buying food lately, you know what I mean. Now, the question is whether this inflation will be temporary or more lasting.

Powell , his colleagues and the pundits claim that higher inflation will only be a temporary phenomenon caused by the base effect. The story goes like this: the CPI plunged in March 2020, which created a lower base for today’s annual inflation rate. There is, of course, a grain of truth here. But let’s take a look at the chart below. It shows the CPI, with both March 2020 (red line) and February 2020 (green line) as a base. As you can see, in the latter case the index jumped 2.3%. Yes, lower, but not significantly lower than 2.6% when compared to March 2020. So, the Fed shouldn’t blame the base effects for accelerating inflation (and funny thing: have you heard the pundits talking about the base effect when they were talking about vigorous GDP recovery?).

Instead, central bankers should blame themselves and their insane monetary policy . After all, as the chart below shows, the Fed’s balance sheet has soared $3.4 trillion (or 81%), while the broad money supply (measured by M2) has increased more than $4 trillion (or 26%) from February to date.

They could also blame reckless fiscal policy . Growing government spending, enabled by a rising pile of debts monetized indirectly by the Fed, has headed for Main Street. This, combined with a jump in the broad money supply, is the key change compared to the Great Recession when almost all stimuli flowed into Wall Street and big corporations. Sure, some people use the received money to increase savings and repay debts. But with the reopening economy, some of the pent-up demand will be realized. Actually, many Americans have already started spending free time traveling like crazy after being locked in homes for so long.

And this is very important: consumers are therefore more eager to accept higher prices. It shouldn’t be surprising given all the checks they got and how hungry for normal life they are. As I reported last month , companies are reporting rising prices of commodities and inputs (partially because of the supply disruptions too), but so far their power to pass the producer price inflation to consumers has been limited. However, this is changing . The April report IHS Markit U.S. Services PMI observes that

Rates of input cost and output charge inflation reached fresh record peaks, as firms sought to pass on steep rises in input prices to clients (…) A number of companies also stated that stronger client demand allowed a greater proportion of the hike in costs to be passed through. The resulting rate of charge inflation was the quickest on record.

All these reasons suggest that higher inflation could be more lasting than most of the so-called experts believe (although the officially reported inflation doesn’t have to show it). This is good news for the yellow metal . Higher inflation implies lower real interest rates and stronger demand for gold as an inflation hedge . What is important here is that we have more inflationary pressure in the pipeline exactly at the time when the Fed has become more tolerant of inflation. So, the combination of higher inflation with a passive central bank position sounds bullish for gold . The key issue here is whether the markets believe that the Fed will allow for higher inflation. So far, they have been skeptical, so the expectations of interest rates hikes accumulated and the bond yields rallied. But it seems that the Fed has managed to convince the markets that it’s even more incompetent than it is widely believed. If the distrust in the Fed strengthens, gold should return to its upward trajectory from the last year.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter . Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

 

Lumber and Copper Are Surging. Will Gold Join the Party?

The rise in lumber prices can be seen in the chart below:

What a surge! It happened because of the limited supply and strong demand for new houses. But it’s not just lumber. Many raw commodities are rallying too. The price of copper, for example, has just approached its record height (from February 2011), as the recovery of the global economy boosted demand. Just take a look at the price below.

Indeed, the trend is up. Commodity prices are on the rise as a whole as the chart below clearly shows. Even Warren Buffet warned investors against a “red hot” recovery, saying that his portfolio companies were “seeing very substantial inflation” amid shortages of raw materials.

Of course, commodity price inflation and consumer price inflation are quite different phenomena, as consumers don’t buy lumber or copper directly but only finished products made from these materials. However, at least part of this producer price inflation may translate into higher consumer prices, as producers’ ability to pass higher costs on consumers has recently increased – people have a large holding of cash and are willing to spend it.

Implications for Gold

What do rallying commodity prices imply for the precious metals? Well, rising commodity prices signal higher inflation, which should increase the demand for gold as an inflation hedge . Of course, there might be some supply disruptions and bottlenecks in a few commodities. However, the widespread character and the extent of the increase in prices suggest that monetary policy is to blame here and that inflation won’t be just transitory as the Fed claims.

What’s more, the commodity boom is usually a good time for precious metals . As the chart below shows, there is a strong positive correlation between the broad commodity index and the precious metals index.

There was a big divergence during the pandemic when commodities plunged, while gold at the same time shined brightly as a safe-haven asset . So, the current lackluster performance of the yellow metal is perfectly understandable during the economic recovery.

Indeed, the rebound in gold has been weak, and gold hasn’t even crossed $1,800 yet, although it was close this week, as the chart below shows.

There was a rally on Monday (May 3) amid a retreat in the US dollar, but we were back in the doldrums on Tuesday, amid Yellen’s remarks about higher bond yields . She said that interest rates could rise to prevent the economy from overheating:

It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy

However, Yellen clarified her statements later, explaining that she was not recommending or predicting that the Fed should hike interest rates. Additionally, several FOMC members made their speeches, presenting the dovish view on the Fed’s monetary policy . For example, Richard Clarida, Fed Vice Chair, said that the economy was still a long way from the Fed’s goals and that the US central bank wasn’t thinking about reducing its quantitative easing program .

Anyway, the price of gold has been trading sideways recently as it couldn’t break out of the $1,700-$1,800 price range. This inability can be frustrating, but the inflationary pressure could help the yellow metal to free itself from the shackles. The bull market in gold started in 2019, well ahead of the commodities. Now, there is a correction , but gold may join the party later . It’s important to remember that reflation has two phases: the growth phase when raw materials outperform gold and the inflation phase when gold catches up with the commodities. So, we may have to wait for a breakout a little longer, but once we get it, new investors may flow into the market, strengthening the upward move.

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. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today . If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

Will Biden Build Back Better… Gold?

Last week was full of big events. The FOMC released its newest statement on monetary policy meeting, while Powell held the press conference. On the same day, President Joe Biden made his first speech to Congress . Let’s take a look at his words.

First of all, Biden laid out his American Jobs Plan , which proposes more than $2 trillion to upgrade US infrastructure and create millions of jobs. No matter that infrastructure spending has no stimulus effect, according to economic research .

Second, if you think that $2 trillion is a lot of money, given America’s huge indebtedness, you are clearly wrong. Two trillion is practically nothing and definitely not enough, so Biden proposed another $1.8 trillion American Family Plan in investments and tax credits to provide lower-income and middle-class families with inexpensive childcare.

Third, Biden understands that all these expenditures cannot be funded solely by increasing already huge fiscal deficits (see the chart below) and issuing new bonds.

So, he proposed a hike in tax rates:

It’s time for corporate America and the wealthiest 1% of Americans to pay their fair share. Just pay their fair share (…) We take the top tax bracket for the wealthiest 1% of Americans –
those making $400,000 or more – back up to 39.6%.

No matter that corporate taxes are implicit taxes on labor and that the current proposals for tax hikes are unlikely to fund the White House’s ambitious plans.

Biden also proposed several reforms of the labor market: a 12-week paternal leave for families and an increase of the minimum wage to $15 an hour.

So, in short, his speech called for several bold economic policies aiming to increase government spending and strengthen the American welfare state. Sounds good… for gold.

Implications for Gold

What does the Biden speech, and more generally his economic agenda, imply for the precious metals market? Well, it seems that the President cares not only about the workers, but also about the gold bulls. His plan is fundamentally positive for the yellow metal . After all, Biden wants to further increase government spending, which will weaken the long-term pace of economic growth and add to the mammoth pile of the public debt .

There are also hints that this massive government spending flowing directly to the citizens could ignite inflation . After all, the US economy has already recovered from the pandemic recession , at least in the GDP terms, as the chart below shows. So, Biden’s economic agenda risks that the economy will overheat igniting inflation.

He also adopted a more confrontational stance toward China, which could elevate the geopolitical worries and increase the demand for safe-haven assets such as gold .

Another potential benefit is the proposal to raise corporate taxes, which is clearly negative for the US stock market and the greenback . Hence, gold could gain at their expense, especially if we see a pullback in the equity market…

Last but not least, the increase in the minimum wage, and other labor market reforms, will not help in a quick employment recovery, so the Fed will maintain its dovish policy for longer. Indeed, we should look at Biden’s message together with the Fed’s signals. Biden proposed trillions of dollars in new spending, while Powell reiterated no hurry to raise interest rates . What a policy mix! We have both easy monetary policy and loose fiscal policy , a golden policy mix , indeed.

Gold didn’t react strongly to these events, which is a bit disturbing, but this can be explained by the gains on Wall Street, as investors felt reassured that a financial bonanza would last undisturbed. So, the economic confidence remains high, but if it wanes, especially if inflationary threats come to the surface, gold may perform better.

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. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today . If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

Gold Sings a “Hot N Cold” Song

Oh, how wonderful, spring has finally started, hasn’t it? We have April, after all. Well, in calendar terms, it’s indeed spring, but economically it can be summer already or still the beginning of winter. How so? I refer here to Kondratiev cycles (also known as Kondratieff cycles or Kondratyev cycles).

As a reminder, Nikolai Kondratiev was a Russian economist who noted in the 1920s that capitalist economies experience long super-cycles, lasting 40-60 years (yup, it’s not a very precise concept). His idea was that capitalism was not on an inevitable path to destruction, but that it was rather sustainable and cyclical in nature. Stalin didn’t like this conclusion and ordered a prison sentence and, later, an execution for Kondratiev. And you thought that being an economist is a boring and safe profession!

The Kondratiev cycles, also called waves, are composed of a few phases, similar to the seasons of the year. In 2018, I defined them as follows:

  • Spring : economic upswing, technological innovation which drives productivity, low inflation , bull market in stocks, low level of confidence (winter’s legacy).
  • Summer : economic slowdowns combined with high inflation and bear market in stocks, this phase often ends in conflicts.
  • Autumn : the plateau phase characterized by speculative fever, economic growth fueled by debt, disinflation and high level of confidence.
  • Winter : a phase when the excess capacity is reduced by deflation and economic depression, debt is repaid or repudiated. There is a stock market crash and high unemployment rate , social conflicts arise.

However, other economists define these phases in a slightly different manner. For them, spring is an inflationary growth phase, summer is a period of stagflation (inflationary recession ), autumn a deflationary growth period, while winter is a time of deflationary depression.

So, which phase are we in? That’s a very good question. After all, the whole concept of Kondratiev cycles is somewhat vague, so it’s not easy to be precise. But some experts believe that we are likely in the very early part of the winter after a very long autumn . Indeed, there are some important arguments supporting such a view.

First, we have been experiencing a long period of disinflation (and later just low inflation), a decline in the bond yields , and economic growth fueled by debt. I refer here to the time from the end of the Great Recession until the Covid-19 pandemic , but one can argue that autumn lasted since the early 1980s, when both interest rates and inflation peaked, as the chart below shows.

Second, winter is believed to be a depression phase with stock and debt markets collapsing, but with commodity prices increasing. And this is exactly what we are observing right now. I refer here to the rally in several commodity prices. This is at least partially caused by the disruption in the supply chains amid the epidemic in the U.S. and worldwide pandemic, but if the bull market in commodities sets in for good, this could be a negative harbinger for the stock market. After all, more expensive raw materials eat into corporate profits.

Third, winter is thought of as a period that tears the social fabric of society and deepens the inequalities. The data is limited, but the coronavirus crisis has been one of the most unequal in modern U.S. history, as its costs have been borne disproportionately by the poorer parts of society that have been unable to work online.

So, “winter is coming” may be a belated warning, as winter could have already begun. Later during this period, we could see bankruptcies of firms and financial institutions, and even some governments, as a delayed consequences of the coronavirus crisis. This is bad news for the whole of Westeros and its economy, but good for gold. Investors who don’t like the cold should grab a golden blanket to hedge them from the winter.

However, in 2018, I expressed the opinion that summer may come in the 2020s, as the debts are rising and the inflationary pressure is growing:

As the global economy recovered and now expands, inflation is low, while stocks still rally, we enjoy spring. This is why gold has remained in a broad sideways trend in the last few years. However, as we are on the edge of the next technological revolution, confidence is finally rising and there are worries about higher prices, and we could enter the summer phase in the not-so-distant future.

And I still believe that my opinion makes sense. Indeed, after the global financial crisis of 2007-9, we have seen several spring features: low inflation, a bull market in stocks, and a low level of confidence (after all, there was “the most hated rally in the stock market”), which was a legacy of winter, i.e., the collapse of Lehman Brothers and the following economic crisis .

And summer is generally a period of stagflation, which is exactly what I’m expecting. You see, after a strong economic recovery in the nearest quarters, the U.S. economy is likely to return to a mediocre pace of economic growth, but with much higher inflation. After all, there is strong monetary and fiscal stimulation ongoing right now, another feature of summer. Meanwhile, winter is generally a deflationary period, so the specter of inflation rather suggests that summer may be coming and investors should hedge themselves against waves of gold.

Luckily, gold offers its protection not only against winters, but also against summers . Indeed, gold performs the worst during autumns, when there is disinflation, like in the 1980s and the 1990s, and the best during winters (due to the economic crisis – remember the 2000s?) and the summers (due to high inflation – remember the 1970s?).

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter . Once you sign up, you’ll also get a 7-day no-obligation trial for all of our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.