The next surge in gold is just waiting to happen

Spark Global Limited reports:

Since the beginning of August last year, the price of gold has barely risen for a full year.

Not only did it not go up, but as the Fed’s balance sheet grew from $6.9 trillion to $8.2 trillion today, the price of gold fell by more than 10%.

Spark Global Limited reports:

Spark Global Limited reports:

In particular, gold has not risen much in recent times, despite the fed’s printing of money, even as Treasury yields have fallen from 1.7% in April to 1.2% today.

According to Comex’s regression model of gold prices and the yield on 10-year TIPS, the price of gold is now as much as $120 below fair value.

 

Why, we ask?

Until I saw a set of data that made me understand why gold had been holding up.

This is the figure below, the 10-year Breakeven Inflation Rate — which can be interpreted as the market’s expectation of long-term future Inflation.

 

Where does the break-even inflation figure come from?

If you take the yield on Treasury bonds and the yield on TIPS, that’s the difference.

The figure is near an 18-year high of 2.5% and is now 2.4%.

Over the past 18 years, with the exception of the global financial crisis in 2008 and the pandemic crisis in March 2020, this inflation expectation has remained stable at around 2%, with a high of 2.8% and a low of 1.2%.

That is why, when the break-even rate of inflation hits a high of 2.5 per cent, the market assumes that this should be the highest estimate of long-term inflation and that it will be good to have it there in the future.

As a result, gold has become particularly unvolatile as Treasury yields have become less volatile, with 30-day price volatility again, until recently, close to the one-year low it reached in April.

 

Why are long-term inflation expectations so stable when the Fed has been printing $4 trillion since March of last year?

The simple answer is that the market trusts the Fed!

The history of dollar inflation expectations over the past 18 years has convinced markets that the Fed can keep inflation under control this time around, even if it is printing money like crazy, so they believe the Fed’s commitment to a long-term inflation rate of just over 2 per cent (roughly close to break-even).

Most of the time, the market is right.

But this time, I’m judging that there’s a very high probability that the market’s expectations will be wrong. Over the past two decades, inflation expectations have been falling, partly because of the Federal Reserve’s control, but more importantly because of China’s entry into the WTO and the deepening of globalization, because China has produced a large number of good and cheap consumer goods, resulting in a small increase in THE WORLD’s CPI in dollar terms. In other words, the market has been “expecting” long-term inflation in the dollar to be around 2% because actual inflation has not been rising.

If you look at US core inflation (which excludes food and energy prices), it is true that it has fluctuated around 2 per cent for the past 25 years, and even three rounds of QE in 2008 only briefly lifted core inflation above 2 per cent.

 

 

But this time, it was different.

Note that in February 2020, before the global outbreak, core inflation in the United States was already at 2.4 percent, where it had been for a year and a half.

 

This suggests that even without the rampant money printing since March 2020 and the impact of the pandemic, inflation in the United States would probably remain above 2 percent.

Since March 2020, the fed has added the option of printing money like crazy.

The rise in prices after QE in 2008 was largely driven by higher food and energy prices, and while inflation rose to around 4 per cent, the rise in core CPI was modest, remaining close to 2 per cent. But this time it is nothing like the rapid rise in inflation and core inflation that followed 2008.

When the U.S. government has put forward the concept of core CPI, is to weed out food and energy prices, because think it have a seasonal effect two data, and other data is long-term impact – this time, both inflation and core inflation, are synchronous, and improve the speed, it shows that, This time the price rise is not a short-term thing, but is likely to be long-term.

Not to mention that the price of crude oil (energy) and corn and wheat (food) have continued to rise, even for base metals (copper, iron, aluminium, lead, zinc, tin and nickel) that have remained low for most of the past few decades. They have also been rising since March 2020.

Worst of all, the basic metal, in addition to the monthly average price of iron ore, copper and tin beyond its history in the name of the highest price, the other four basic metal, dollar nominal prices are up more than 2007 high (below the line of top-down respectively, nickel, tin, copper, zinc, aluminum, lead and iron ore prices, unit is usd/mt).

 

The unprecedented federal Reserve printing money, combined with the unprecedented epidemic to weaken production capacity, coupled with the unprecedented American, Japanese and European countries to pour money on the public, I believe that the nominal dollar prices of all base metals, within this year and next year, will hit a record high.

Since the us inflation rate rose rapidly in April 2021, Fed Chairman Colin Powell has repeatedly stressed to the media and the market on various occasions that the current high inflation is temporary, and even if high inflation does appear in the future, the Federal Reserve has the means and means to deal with and solve it. But jobs and the economy in the United States are not where they were before the outbreak, so there is still a need to release water. What if inflation disappears on its own?

Thanks to its success in controlling inflation over the past two decades, the Fed has once again won the confidence of the markets.

As a result, market expectations for inflation have been stuck at 2-2.5%, which looks like a 20-year high, with no further rise.

But WHAT Powell said, I think, is nonsense. Since the outbreak of the global pandemic in 2020, the Fed has been desperately pouring water into the pool, and the amount of water has directly doubled. The real wealth of society, however, will not directly double as the Fed’s credit money trick. The only possible outcome is more, more, more. At the same time, the Fed insists that the rising water level in the pool is temporary.

Many people believe that the reason why the great inflation broke out in the west in the 1970s and 1980s was caused by the rise in the price of crude oil.

Unfortunately, this perception is wrong.

Many believe that the great global inflation of the 1970s was triggered by the rise in the price of crude oil — sadly, this is wrong.

As early as 1966, core inflation in the United States was already rising rapidly. At that time, global oil prices were still at a floor price of $1.80 a barrel. From then until 1971, crude oil prices remained low for five years, but core inflation in the United States remained above 4%.

What reason?

First, huge fiscal deficits. At that time, the United States was Mired in the Vietnam War, and its huge military expenditure was supported by fiscal deficit. The fiscal deficit of the government climbed sharply from 1% to 5%, resulting in a significant deterioration of the international balance of payments of the United States government.

Second, give money to people. At that time, the Johnson administration proposed the “Great Society Plan”, specifically, it was to spare no effort to promote various popular welfare acts, the Civil Rights Act, the Poverty Eradication Act and the tax reduction act. It also shouted the slogan of “war on poverty”, leading the nation to think about social problems such as hunger and lack when they were rich. An institutional effort to help “families whose incomes are too low to meet their basic needs” and make America “prosperous for all.”

Huge fiscal deficits mean excess money; Giving people money means they have money to buy goods and services.

The combination of the two, with oil prices at record lows, led to skyrocketing INFLATION in the United States until the 1970s, and then, in 1973, to a spike in crude oil prices, which led to historic global inflation.

So soaring oil prices were not at the heart of the great US inflation of the 1970s or so. Huge fiscal deficits and payouts were. Then you compare what the U.S. government is doing today with what the Federal Reserve is doing; Compare the surge in core inflation in 1966 and 2021.

 

If core inflation rises above 5% over the next six months (from 4.5% in June) and continues to do so, the Fed’s long-held myth of 2% inflation may be broken.

For a long time in the future, the fight against inflation will be a protracted battle for every investor.