The price of gold continues to struggle, despite significant amounts of potential inflationary news and data.
The key support at USD1,800 was not able to hold. USD1,720 is the next major support. For long-term gold investors this weakness provides better entry points to expand their positions. These investors are looking at medium-term charts like these:
And longer-term charts like these (macrotrends.net):
The struggle for the current price action is predicated on two opposing stories. Inflation news and stories are being perceived as good for stocks, bad for safe-havens. The world economy is opening up because the perception of Covid-19 risks is going down. Stocks are flying high and global stimulus remains high. Hope and greed and taking over from fear and caution.
This can be seen in the surge of crypto and tech stocks so far this year. Gold is being seen as a boring asset, a safe haven when none is required since governments and central banks can underwrite risk without any negative consequences.
So, at the moment potential inflation is perversely seen as a reason to sell gold. But what happens when real inflation starts to come through later in the year? If the economy does open up and spending and investment rise, there could be a selloff in all assets as cash becomes more attractive and investors need to cover losses from bond investments.
This has been a pattern during stock market and bond market panics. “Sell what you can, not what you should”. Perhaps this is why gold sold off last week as bonds came under pressure.
Inflation, real, sustained inflation will disrupt the bond market considerably. And at this point, gold should start to move up again as the safe-haven status reasserts itself.
At this point in the market and economic cycle, it is important to keep note of stories that could foreshadow further problems down the road. The below from @CharlieBilello shows that inflation expectations are flying higher:
The chart below from the Wall Street Journal shows that companies with no revenues with valuations at USD1 billion or more are going public now than at any other time before:
The above should make investors be a little cautious. The below front-page story is also not something that should be ignored:
Furthermore, the dividend yield of the S&P500 in the United States is very close to the 10-year US Treasury yield. This means that the annual income from owning stocks is equal to the annual income from owning bonds. Of course, US bonds are assumed to always be repaid, while equities have no such perception:
Copper, deemed a bellwether for growth and inflation is soaring aggressively higher, making a 9-year high:
Commodities in general are making new highs and other headlines recently are equally concerning:
“BLOOMBERG COMMODITY SPOT INDEX RISES TO HIGHEST SINCE 2013”
“US NATIONAL DEBT HITS $28 TRILLION FOR THE FIRST TIME”
“DEMOCRATS PUSH BIDEN TO INCLUDE RECURRING PAYMENTS IN STIMLUS PACKAGE”
The US state of Kansas is considering making gold and silver legal tender:
And thus it is no surprise to see these figures of silver coins, even considering the retail demand for silver earlier in the year:
The spillover into buying silver, especially American Eagle silver bullion coins, pushed the Mint’s total January sales of the coins to 4,775,000 pieces, which is 929,000 coins more, or 24.1 percent higher, than January 2020 sales.
Inflation is beginning to have a real-world consequence. Food inflation is really on the move, expect this to have political consequences also if it continues, as Bloomberg reports:
In Indonesia, tofu is 30% more expensive than it was in December. In Brazil, the price of local mainstay turtle beans is up 54% compared to last January. In Russia, consumers are paying 61% more for sugar than a year ago.
This article is vitally important and is worth reading carefully:
With these pressures building, Russia and Argentina have put price curbs on certain staples and slapped tariffs on exports in an attempt to contain domestic food prices.
At first, markets cheer inflation, especially as in recent years it has meant almost solely asset price inflation, rather the day-to-day cost of living rising. If this changes, and inflation becomes persistent and widespread in basic goods then there will be significant political and economic problems.
After all, the consensus is that deflation has been the main danger, hence the current policies of governments and central banks. But ultimately there will be almost 3 billion extra people in 30 years, all with demands for a Western-style standard of living.
This is leading to a huge demand for resources and commodities, both hard and soft which are undoubtedly inflationary. And once inflation really starts to move, and is seen on a daily basis, and people see their wage not buying what it could previously, then the price of gold as a real asset and safe haven against default and inflation can really begin to move.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.