Gold - When will the Bleeding Stop?

Gold has been in a declining environment since last August when it peaked at around $2070. That is a six month declining price environment. In total about $390 of decline. That’s significant. But does it mean we are now back in a bear market? Or is this just a consolidation before the next leg up, which could be much more powerful? And has the dramatic sell off over the past 10 trading days been a sign of capitulation among short term traders? I’ll weigh in below. It’s just my opinion and we are all entitled to an opinion. At least until the woke mob gets its way.

Gold is massively oversold on every technical indicator I use, so a decently strong bounce is likely (although I have been saying that for about two weeks now). There are a lot of competing issues which are driving the price of gold. Recently, the arguments for a declining price have been much more powerful on the price than those to move the price higher. Here are some of the arguments for not owning gold right now, which translates into a declining price:

1. Inflation is not an issue. All the money printing we have had hasn’t had any effect on inflation so far and continued money printing isn’t likely to change that.

   • To see inflation, we need to see labor costs in the economy increase. With almost 10 million people in the output gap, we have a long way to go.
   • Bond yields have been increasing and this has put more pressure on gold since gold performance is affected by real interest rates (nominal interest - inflation).
     
     

2. Geopolitical risks are not elevated.

   • There doesn’t seem to be as many “on the brink” issues around the world. 

3. COVID issue. 

   • The light is at the end of the tunnel. The world isn’t going to come to an end. Vaccines are here and things are getting better. 

But there is also a strong argument for owning physical gold right now. Here are some general comments:

1. You don’t own gold as a get rich quick scheme. If you want that, play momentum stocks or crypto.

2. Physical gold is an insurance policy against stupidity in government and central banking. There appears to be a plethora of that at the moment.

3. Gold is still in a long term bull market, despite the last six months of declines. 

4. The monetary system is broken. If it wasn’t, then central banks would need to create money to keep the system from falling apart. At some point, and we can NOT predict when, things will break. My most likely scenario is a break in our tenuous trading relationship with China. They want to dominate the world in many ways. In manufacturing, they already dominate. Militarily, they are trying to play catch up, which is easier as the US loses more economic independence. Financially. They want to have the reserve currency along with its many benefits. They have already made inroads within Asia to eliminate the need for the USD. That trend will continue. 

5. No counterparty risk. Gold is one of the few assets where you don’t have a counterparty. I am referring to physical ownership, not owning GLD, where your broker is still your counterparty. 

6. We are getting lulled into thinking that money printing doesn’t create inflation. That has certainly been the case for well over a decade now. But it can’t go on forever. When it breaks, it will be too late to get into gold. You need to position now. Hold it, and forget about it. 

So the answer to my question in the title. Gold will stop going down in the short term as soon as we have either a whiff of inflation above consensus expectations OR yields on Treasuries reverse and start heading lower.  

Here is a question I don’t have an answer to and it relates to how concerned the Federal Reserve or Federal Government is with higher interest rates. Let me know your thoughts. 

Is the both the Fed and Federal government’s concern the effect that higher interest rates have on economic growth? 

I say this because when the Fed monetizes debt, it doesn’t really cost the government anything to speak of in interest payments. Since all excess interest paid to the Fed by the government gets returned to the Treasury, then it doesn’t really matter what the interest rate it…. so long as the Fed monetizes it all (of course if it doesn’t monetize it all, then that does matter).

Please email me your thoughts. dbarrett@aureuspos.com