How Global Inflation Impacts The Price of Gold

Goldex Team

Editorial content

The global inflation story continues to grow in strength on a daily basis. Gold is acting accordingly:

The bounce of the March lows has been emphatic. This now creates a base of resistance at the USD1700 level once again. Indeed, the inflows into the SPDR Gold Trust last Friday 7th May were the biggest since mid-January.

Going through the latest inflation proxy charts shows how much can change since the previous issue of this report just two weeks ago:

Iron ore has been moving so aggressively that the Dalian exchange has increased its margin requirements. This sort of thing does not happen in a market where buyers and sellers are calm. These measures are designed to ensure a functioning market:

The global recovery looks stronger than ever now. Add both the current geopolitical tension between Australia and China as well as the many stimulus programmes out there and it is no surprise that iron ore keeps going up. It is now at a record high.

Iron ore price leaps 10% on hopes of global economic recovery

Lumber continues its surge:

The US Services PMI – Prices Paid report also showing huge inflationary issues:

Inflation Risk Intensifies With Supply Shortages Multiplying

It is not speculators pushing prices up. Below is a basket of non-exchange traded commodities. This basket includes lard, resin, wool, hides, scrap steel etc:

Corn:

Shipping costs are also rising relentlessly:

This can also be seen in the Baltic Dry Index, a proxy for global growth for bulk shipping rates:

The supply shortage in semiconductors is pushing both new and used cars higher in the United States. This has meant that rental car companies such as Hertz are buying used cars to add to their fleet, which was previously unheard of:

Rental Companies Buy Up Used Cars as Chip Crisis Get Worse

Even the Oracle of Omaha, seen as the world’s greatest ever investor, was talking about inflation at the Berkshire Hathaway Annual General Meeting:

“We’re seeing very substantial inflation – it’s very interesting. I mean, we’re raising prices. People are raising prices to us. And it’s being accepted.”

Another famed global investor, Stanley Druckenmiller, who used to work with George Soros sounded the warning bell yesterday. The whole interview is worth watching:

Druckenmiller is riding the ‘raging mania’ in stocks but expects to sell before year’s end

Stanley Druckenmiller says the Fed is endangering the dollar’s global reserve status

The key point for the second article:

Fed policies could end up threatening the long-term health of the U.S. dollar, investing magnate Stanley Druckenmiller told CNBC:

“I can’t find any period in history where monetary and fiscal policy were this out of step with the economic circumstances, not one”

While this “decline of the US Dollar” is often spoken about such a decline would need to have an alternative. Of course, there is gold, but what about crypto? Well, at the moment, the outlook is a little murkier than before:

Cryptocurrency investors should be prepared to lose all their money, Bank of England governor says

U.S. court authorises IRS to seek identities of taxpayers who have used cryptocurrency

SEC Warns of Bitcoin Futures Risks in Mutual Fund Investments

Cryptocurrency Exchanges Need Direct Regulation, SEC Chair Says

German and US regulators tighten focus on booming crypto market

Dogecoin tumbles after Elon Musk calls it a ‘hustle’ on ‘SNL’ show

Governments are slowly but surely starting to understand the threat crypto is, not only to retail investors through fraud, but also to both the integrity of the financial system and indeed the ability of the West to dominate the world financial system. For example, governments are seeing how crypto can be used to finance terrorism and evade sanctions.

Expect an increasingly belligerent voice from governments regarding crypto. They have woken up.

And they will be keen to get their own digital currencies up and running as soon as possible. The Bank of England is one example:

What is “Britcoin” and what could it mean for you?

Ultimately most people would prefer a currency backed by government than one that appears to be the play-thing of Silicon Valley elites. People also recognise the fashionable and quick-moving nature of technology. They only have to look at their mobile phones and understand how quickly the cutting edge becomes redundant.

This is why it looks like Gold is poised to make a return towards the more recent highs. Despite many warning that the Fed and other central banks are playing with fire, central banks and politicians seem in no mood to turn the stimulus taps off, especially when the pandemic is far from over. Gold has been in fashion longer than almost everything else.

Remember the whole idea of printing money is devalue the currency and the gigantic debt bubble that has been created.

The “powers that be” want inflation. And they want more inflation and more after that.

It is both inflation and hyperinflation that they think they can control. Only time will tell if that will be the case and that if the current spike is indeed only “transitory”.

 

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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.