The Global Rush to Own Gold Has Only Just Begun

The comments below are an edited and abridged synopsis of an article by Fringe Finance

Judging by the action in gold recently, one might assume that rate hikes have been implemented and that Russia and Ukraine have declared a cease-fire. Neither of those things have happened, so the recent sell off in gold is misguided.

The Global Rush to Own Gold Has Only Just Begun - BullionBuzz - Nick's Top Six
Gold with Dart Arrows. 3d render

Following a melt up/short squeeze in the equity markets, ostensibly due to cease-fire talks, gold sold off by about $70 within two trading sessions.

The combination of the Fed embracing rate hikes and the Russia/Ukraine conflict potentially slowing down has the market thinking that safe havens may not be necessary going forward.

This is not realistic, however. Russia has said that nothing promising has taken place in peace talks so far, and the Fed hasn’t begun to approach the problem of inflation yet.

A cease-fire doesn’t mean that the economic sanctions against Russia are going to be withdrawn. These sanctions have forced Russia and China to cross the Rubicon, where it seems that they may challenge the US dollar with gold.

The US has seen only one 25 bps hike. Real rates are between -6% and -8%. This is a bullish scenario for gold. Real rates will remain negative for some time. If they don’t, the Fed will have raised rates so high that there will be a massive debt crisis forcing people into gold as a sovereign debt crisis safe haven, after they first sell it in a rush to deleverage.

The author says that both outstanding risks—Russia and inflation—lead to gold moving higher.

In the case of Russia, expect permanent changes to the way it conducts business globally (i.e. sells oil and natural gas) that will be bullish for gold.

As for inflation, the Fed will hike until the market crashes. It will then be forced to take a dovish stance on monetary policy, while hoping that CPI turns lower so that it can claim victory in the face of negative real rates. This is the likeliest outcome for dealing with inflation, and it is also the most bullish scenario for gold.

No matter what, it feels like a new global economy waits in the wings and that it is only a matter of time before gold gets the nod to do what it does best: Preserve wealth, store value and act as sound money.

Leave a Reply

Your email address will not be published. Required fields are marked *