What’s Ahead for The Gold Market?
The comments below are an edited and abridged synopsis of an article by Rudi Fronk and Jim Anthony
Gold entered a period of increased volatility during the third quarter, usually a positive indicator for the metal. Global ETFs have been net purchasers for 11 consecutive months, and central banks have also been net purchasers every month this year except October.
Gold will move higher as the US election log jam begins to clear. That has curtailed new fiscal stimulus since July, when direct transfers to individuals exhausted their Congressional approvals. This pause in fiscal stimulus, which took government transfer payments to an astonishing 25% of household income, coincided with a pause in gold’s upward momentum. Further stimulus is favoured on both sides of the House, and there will be trillions more in fiscal stimulus.
The two main drivers of gold are the US dollar and real yields. Expect both to be positive in 2021.
The dollar: The Fed will be forced to fund whatever expenditures the Congress approves. Foreign holdings are at 10-year lows as the largest sovereign purchasers became net sellers this year. Fed debt monetization will accelerate in the next few months with a negative effect on the dollar. It was a $3 trillion expansion of the Fed balance sheet in March and April that equaled a sudden increase in the US deficit to $3 trillion, unleashing gold from its March low. Debt monetization is a formula for dollar weakness.
Yields: The market favours a reflation trade due to the vaccine initiative. This has buoyed the sale of Treasuries, driving up yields. However, higher yields cannot be allowed to dampen economic recovery. The Fed may cap yields, a policy that will require more QE. This will mean increased inflation expectations and lower real yields, a formula for higher gold. If yields cannot rise to attract and hold private capital, the Fed must buy more debt and the dollar must fall.
Today’s QE is being mainlined into the real economy by way of direct transfer payments to individuals and business, forgivable loans and bailouts. Money supply is expanding at a blistering pace. Gold is the best protection for private wealth, and there is not enough of it to serve this purpose at current prices.
The growth in MZM money supply—the money available for immediate expenditure—is 27.5% year over year, down from 30% two months ago, an unprecedented pace of money creation that is temporarily keeping the economy afloat.
