The gold price action has not been overly kind to investors in the past few weeks. The December 2020 low has been broken intraday. From a purely technical chart perspective this level needs to hold.
But taking a more nuanced, overall view, gold’s performance has actually been very stable, and calm given what has been happening all around it. In other asset classes there the first signs in many years of what could be termed by central bankers as “irrational exuberance” or what traders would call crazy bullishness.
While the doomsayers in equity markets are always calling a bubble, more tempered heads are paraphrasing Churchill. It is not the end, not even the beginning of the end, but perhaps the end of the beginning. Seasoned traders will always tell you that markets rarely crash from the top. The pessimists throw in the towel and the first down move in equity indices gives room for them to capitulate before the markets once again rise.
And then, when sentiment and positioning are “all-in”, then, and only then, can markets come off. Gold can begin to move higher. But stock market crashes are really only a small part of gold’s potential move up. Gold can move up well before that.
Let’s take a look at the news this week that should be constructive in the long term for gold. Here’s a headline that just flashed up:
GLOBAL GOVERNMENT DEBT EXPECTED TO JUMP BY ANOTHER $10 TRILLION AND SURPASS $92 TRILLION BY END OF 2021- IIF
GLOBAL DEBT SOARED $24 TRILLION IN 2020 TO NEW RECORD HIGH OF $281 TRILLION – IIF
Stimulus and government spending are still rising like never before. And have never been cheaper to service due to ultra-low rates (UK example but the pattern is repeated throughout the West):
Policymakers are living in a different reality to the rest of us (once again). These statements are all from key US interest-rate policymakers recently:
“I am not thinking that we have unwanted inflation around the corner, I don’t think that’s a risk we should think about right now”
“The strong pickup in economic activity projected for this year should generate a temporary boost to inflation; but whether this becomes embedded into inflation expectations and produces a more sustained increase in underlying inflation is an open question”
Philadelphia Fed President Patrick Harker told CNBC last Thursday that inflation only will be a problem if it shows a sharp acceleration, and that the central bank won’t have to worry about inflation getting in its way anytime soon.
Chicago Fed President Evans says current inflation maybe transient and should be looked past. “The strong pickup in economic activity projected for this year should generate a temporary boost to inflation; but whether this becomes embedded into inflation expectations and produces a more sustained increase in underlying inflation is an open question”
Compare this to what businesses are saying:
“We have inflation, we are seeing inflation, we are concerned about inflation. We have to mitigate that inflation, or at least part of it, with hedges and with efficiencies in the factories,” – Kraft Heinz
“continued cost pressures in production and transportation” – Greif
“with respect to supply chain, yes, we’re absolutely seeing it (input cost pressures). We’re seeing inflationary pressures in copper. We’re seeing it in some steel. We’re seeing some availability and some pressures also on microprocessors and the like around the company.” – Eaton
And what surveys are saying:
“stock shortages and shipping delays led to a further marked deterioration in supplier performance and added further upwards pressure on costs.” – China PMI
“There was an associated acceleration in the rate of input price inflation faced by German manufacturers to the highest since July 2018.” – German PMI
Inflation is happening, and it is happening now. Markets and businesses are looking past Covid-19 and getting ready.
Furthermore, flows into the stock market are at all-time highs:
While the world stock market cap is at an all-time high:
Commodity prices are beginning to move for the first time in many years:
And markets are beginning to pay attention:
And also reflected in the mining stock index:
And also, here:
And here in copper:
And here in oil, even though apparently the world will soon be in a post-oil world:
And in lumber:
Everything above has been historically bullish for gold. Inflation danger seems real. The bias of policymakers is to avert crises. Not one of them has been worrying about inflation, only deflation.
Even with valuations soaring, yields collapsing even in junk bonds, and animal spirits getting out of control on the Robinhood app with the reddit / wallstreetbets, GME fiasco, not one of them has said inflation is a real concern. Maybe for guidance reasons they cannot. Maybe they really do want it. But with so much moving higher at an alarming rate perhaps it is time for a little caution.
That is to say nothing about Bitcoin going through USD50000 per coin, helped significantly by Elon Musk announcing an investment of USD1.5billion in the crypto (though mentioning also potential investments in gold and other precious metals). The price move afterwards helped Tesla record its most profitable investment ever, despite selling cars for over a decade. Musk’s frequent Twitter referencing to a crypto called dogecoin (initially started as a joke) all contributes to a feeling that things are starting to get a little surreal and out of control.
But perhaps this is the new world. Companies don’t need to make money, governments can print or borrow all they want, and a technology that surely will be redundant in 10 years is being hailed as a long-term store of value is all the new normal. Usually, the most persuasive time in markets is when prudence hurts the ego. We aren’t there yet. But it could be soon.