The comments below are an edited and abridged synopsis of an article by Michael Pento
Investors need to know what influences the gold price, given the falsification of asset prices and debt monetization taking place today. Gold is not driven by fear of a market crash, nor does it react to the inverse correlation to the US dollar. The Fed’s interest rate suppression since 2007 is the main reason behind the outperformance of gold compared with the S&P500. This is true even in the context of a rising dollar.
Pento details what drives a gold bull market, and says it can and does occur while the dollar and stocks are rising, but if nominal Treasury yields are rising in the context of relatively benign CPI, then gold may significantly underperform. When bonds yields fall in the context of rising inflation, gold can really boost overall performance.
Physical gold competes with cash and the risk-free rate on US Treasuries. This is calculated by using the interest your money receives in the bank and/or sovereign bonds, minus the rate of decline in its purchasing power (inflation). This is what hedge funds and Wall Street are most focused on.
Where does the gold sector go from here? The Fed will peg the short end of the yield curve at zero for the foreseeable future. But to what extent will it allow longer-duration Treasury yields to rise?
Pento predicts some of the best economic data on record to be reported in late June/July. This will only mean the US is moving from a deep depression to a bad recession; nevertheless, the rate of change in the data will be profound.
Determining the direction of real interest rates, and thus the direction of gold, is critical, because getting caught on the wrong side of this trade can become a complete portfolio debacle.
An improving economy in the context of dissipating Covid-19 coupled with Fed tapering could (temporarily) send nominal yields rising much faster than inflation, especially given the low level of Treasury yields and the huge amount of supply that must be taken in by what is left of the free market.
In the longer term, stagflation is the likely macroeconomic destination, which is the perfect storm for gold. The inflation will come from the Fed’s helicopter money and its $7-trillion balance sheet that has grown 7-fold in the past 12 years.
The Fed will be forced to peg the yield curve close to the zero-bound range indefinitely, as the economy does not recover sufficiently enough to allow the tens of millions of unemployed people to find work. Hence, the stated return on risk-free money will be zilch, just as rising CPI causes real yields to fall into record-low territory.