Arkadiusz Sieron https://goldbroker.com/news/authors/arkadiusz-sieron Gold rallied thanks to the changed narrative on inflation, and Biden’s infrastructure plan can only add to the inflationary pressure. Huge price moves ahead? I have a short quiz for you! What the government should do to decrease inflation that reached the highest level in 30 years? A) Decrease its expenditure to make room for the Fed to hike the federal funds rate. B) Press the US central bank to tighten its monetary policy. C) Deregulate the markets and lower taxes to boost the supply side of the economy. D) Introduce a huge infrastructure plan that will multiply spending on energy, raw materials, and inputs in general. Please guess which option the US government chose. Yes, the worst possible. Exam failed! At the beginning of November, Congress passed a bipartisan infrastructure bill. And President Biden signed it on Monday (November 15, 2021). To be clear, I’m not claiming that America doesn’t need any investment in infrastructure. Perhaps it needs it, and perh... Mon, 15 Nov 2021 23:01:56 +0000 https://goldbroker.com/news/biden-signs-bill-to-revive-infrastructure-and-gold-2546 Following three previous reports, the WGC revealed two more interesting publications at the turn of July and August. The first one is the report about gold demand trends in Q2 2021. As we can read, the demand for gold was virtually flat in Q2 (y-o-y), but in the first half of the year it decreased 10.4%. Importantly, there were modest inflows into gold ETFs in Q2 and also in July, but they only partially offset the huge outflows of the previous quarter. Hence, investors’ sentiment turned more positive in the second quarter, which helped gold prices rebound somewhat after Q1. Indeed, as the chart below shows, the price of gold plunged 10% in Q1 2021. Then, it rebounded 4.3% in the second quarter, but it was not enough to offset the blow from the first three months of the year. In July, the price of gold jumped 3.6%, although it retraced most of that increase in August (it decreased 2.1% in a single day – Aug. 6). So, gold prices declined more than 6% year-to-date.... Thu, 12 Aug 2021 10:34:14 +0000 https://goldbroker.com/news/wgc-believes-that-gold-will-shine-september-2436 The Fed’s reverse repos reached almost $1 trillion in June. Brace yourselves gold bulls – tightening is coming! Something interesting is happening in the financial markets. As you probably know, the Fed’s reverse repurchase operations have been increasing recently. At the very end of June, their volume almost reached one trillion dollars ($991.9 billion)! It’s a record high, as the chart below shows. Oh boy, what a spike! What does it mean? Well, when the Fed purchases assets, it injects liquidity into the markets. On the contrary, when the US central bank engages in reverse repurchase operations, it drains liquidity from the markets. This is because reverse repurchase agreements are purchases of securities with the agreement to sell them at a higher price at a specific future date – of course, we refer here to buying and selling from the point of view of financial institutions. They are purchasing assets from the Fed to resell them later, so they basically len... Wed, 04 Aug 2021 22:28:01 +0000 https://goldbroker.com/news/repos-will-fed-bring-gold-to-the-bottom-2425 The latest WGC reports show that institutional allocation to gold will increase. What if there is more to it than just “higher demand, higher price”? In July the WGC published three interesting reports. The first one, Rethink, Rebalance, Reset: Institutional Portfolio Strategies for the Post-Pandemic Period, is an interesting survey of 500 institutional investors around the world ran by Greenwich Associates between October 2020 and January 2021. The study investigated investors about portfolios, allocations and views on various markets, gold, and other individual asset classes. The main result of the survey is that institutional allocations to gold are expected to increase over the next three years. To be more specific, the study finds that, currently, only 20% of institutions have an allocation to gold in their portfolios, which amounts to 4% of their portfolios, on average. However: Almost 40% of current gold investors expect to increase their allocations in the nex... Tue, 03 Aug 2021 05:51:23 +0000 https://goldbroker.com/news/allocation-gold-set-rise-how-will-prices-respond-2421 The current high inflation could theoretically transform into hyperinflation, disinflation, stagflation, or deflation. What does each mean for gold? Inflation, inflation, inflation. We all know that prices have surged recently. And we all know that high inflation is likely to stay with us for a while, even if we assume that the CPI annual rate has already peaked, which is not so obvious. But let’s look beyond the nearest horizon and think about what lies ahead after months of high inflation, and what consequences it could have for the gold market. From the logical point of view, there are three options. Inflation rates could accelerate further, leading to hyperinflation in an extreme case. They could remain more or less the same, resulting possibly in stagflation when the pace of GDP growth decelerates. And, finally, the rates of annual changes in the CPI could slow down, implying disinflation, or they could even become negative – in this scenario, we would enter the w... Fri, 23 Jul 2021 10:48:14 +0000 https://goldbroker.com/news/gold-behavior-in-various-parallel-inflation-universes-2408 Powell admits that inflation is well above the Fed’s target, but he still considers it transitory. Gold increased in response – only to fall again. Last week, Powell testified before Congress. On the one hand, Powell admitted in a way that inflation had reached a level higher than expected and is above the level accepted by the Fed in the longer run: "Inflation has increased notably and will likely remain elevated in coming months before moderating." It means that the Fed was surprised by high inflation, but it doesn’t want to admit it explicitly. Instead, Powell admitted that inflation would likely stay at a high level for some time. The obvious question here is: why should we believe the Fed that inflation will really moderate later this year, given that the US central bank failed in forecasting inflation in the first half of 2021? What’s more, Powell acknowledged that he hasn’t felt comfortable with the current level of inflation: "Right now, infla... Mon, 19 Jul 2021 14:17:09 +0000 https://goldbroker.com/news/powell-gave-congress-dovish-signs-will-it-help-gold-2403 The ECB adopts a new inflation target. Is the European Central Bank mimicking the Fed or doing its own thing? The revolution in central banking is spreading. Following the Fed, the European Central Bank has also modified its target. Last week, after an 18-months review of its monetary policy framework, the ECB published a statement on its monetary policy strategy, deciding to change its goal from “below but close to 2%” to a more symmetric aim of “2% inflation over the medium term”. The most important part of the statement is below: "The Governing Council considers that price stability is best maintained by aiming for two per cent inflation over the medium term. The Governing Council’s commitment to this target is symmetric." The symmetry means that the ECB considers both overshooting and undershooting as equally bad. In the previous framework, the ECB clearly believed that downside deviations from inflation were less harmful than upside deviations. The medi... Sun, 11 Jul 2021 22:16:23 +0000 https://goldbroker.com/news/ecb-changed-monetary-strategy-will-it-alter-gold-course-2394 When credit spreads narrow, it’s bad for gold. But this time there is a silver lining we can look for, although it’s quite adverse for the economy. There are several important factors affecting gold prices. Many analysts focus mainly on the US dollar and real interest rates. However, what is sometimes even more important is economic confidence. Of course, the level of economic confidence is partially reflected in the strength of the greenback and the bond yields. However, I would like to focus today on credit spreads, an often overlooked indicator of economic confidence. Why such a topic? It’s simple, just take a look at the chart below. As you can see, the ICE BofA US High Yield Index Option-Adjusted Spread, which is a proxy for a spread between the yield on below-investment-grade-rated corporate debt and Treasuries of the same duration, has recently declined to a very low level. To be more precise, the analyzed indicator slid from almost 11 in March 2020 to 3.1 at th... Tue, 29 Jun 2021 10:30:18 +0000 https://goldbroker.com/news/credit-spreads-declined-unprecedentedly-will-gold-follow-2375 The recent Fed’s hawkish turn is fundamentally negative for gold prices but there is still some hope. The hawkish counter-revolution within the Fed continues. On Friday, St. Louis Fed President James Bullard said that the recent FOMC shift towards a faster tightening of monetary policy was a natural response to faster economic growth and higher inflation than anticipated: We were expecting a good year, a good reopening, but this is a bigger year than we were expecting, more inflation than we were expecting, and I think it's natural that we've tilted a little bit more hawkish here to contain inflationary pressures. Bullard also noted that “Powell officially opened the taper discussion this week”. Indeed, in my Friday edition of the Fundamental Gold Report, I focused on the changed dot-plot, which suggested that FOMC members were ready to hike interest rates twice in 2023. However, the second major shift in the stance of the US central bank was that the Fed of... Tue, 22 Jun 2021 14:05:42 +0000 https://goldbroker.com/news/will-gold-survive-hawkish-fed-2368 With the CPI annual inflation rate spiking 5% in May, gold could have gained a lot in response. However, it rallied only $20. Should we prepare for more? Whoa! Inflation soared 5% in May – quite a lot for a nonexistent (or transitory) phenomenon! But let’s start from the beginning. The CPI rose 0.6% in May, after increasing 0.8% in April. Meanwhile, the core CPI, which excludes food and energy, soared 0.7%, following a 0.9% jump in April. So, given that the pace of the monthly inflation rate decelerated, we shouldn’t worry about inflation, right? Well… we should. First of all, inflation was higher than expected, as the consensus forecast was a 0.4% increase. Inflation surprised pundits once again, but not me. Last month, I wrote in the Fundamental Gold Report that “Inflation escalated in April. In May, however, inflation could be softer, but it will remain relatively elevated, in my view” – and this is exactly what happened. However, the unexpected rise in inflation is... Tue, 15 Jun 2021 04:15:20 +0000 https://goldbroker.com/news/inflation-soars-5-percent-will-gold-skyrocket-2362 May was certainly a positive month for the yellow metal. Gold could keep its momentum later this year, but a lot depends on the Fed and inflation. We left May in the rearview mirror, and as the chart below shows, it was the second positive month in a row for the yellow metal. Gold rose 7% last month – this is 12.3% since the local bottom on March 31, 2021. The jump was driven mainly by inflation fears, a weak greenback and a decrease in real interest rates. Hence, I was right: the second quarter has been so far much better for the shiny metal than the first one, in which it declined by 11%. Gold even jumped temporarily above $1,900 at the turn of May and June. Since then, it has been fluctuating around this level. All this means that the yellow metal fully recovered its Q1 losses, finishing last month virtually flat year-to-date. Now, the key question is: what’s next for gold? Outlooks are, as always, divided. Some analysts point out that gold’s struggle to mo... Thu, 10 Jun 2021 07:15:49 +0000 https://goldbroker.com/news/will-gold-rally-continue-in-the-upcoming-months-2356 Gold may benefit from government money flooding households and people less willing to work – as evidenced by the low value of nonfarm payrolls. According to the recent BLS Employment Situation Report, total nonfarm payrolls rose by 559,000 in May, following disappointing increases of 278,000 in April, as the chart below shows. What is disturbing here is that this time the US economy also added significantly fewer jobs than expected – economists surveyed by MarketWatch forecasted 671,000 additions. Moreover, labor force participation and employment-population rates were little changed, remaining significantly below the pre-pandemic levels. On the positive side, the unemployment rate edged down from 6.1% to 5.8%, as the chart above shows. However, even though the number of unemployed people fell considerably from its recent high in April 2020, it remains well above the level seen before the Covid-19 epidemic. In February 2020, 5.7 million Americans were without a... Sun, 06 Jun 2021 22:30:56 +0000 https://goldbroker.com/news/us-government-stimulus-went-wrong-how-will-gold-react-2353 Biden proposes $6 trillion of government spending in the 2022 fiscal year. This continuation of ultra-loose fiscal policy could support gold in the long run. On Friday (May 28), the White House presented the President’s budget for the 2022 fiscal year that starts on October 1, 2021. Biden trumped Trump and proposed $6 trillion, over one trillion more than Trump in his last year’s proposal for $4.8 trillion. Furthermore, POTUS wants to raise government outlays to up to $8.2 trillion by 2031. According to the White House, the proposed fiscal agenda will further increase the total federal debt-to-GDP ratio, from the current 129.1% to 136.9% by 2031. Meanwhile, the federal debt held by the public is estimated to rise from the current 100.7% to 108.5% of the GDP. The current level of the US public debt compared to the size of the economy is presented in the chart below. Despite the increase, Janet Yellen, Treasury Secretary, said that “it is a fiscally responsible... Tue, 01 Jun 2021 02:47:55 +0000 https://goldbroker.com/news/biden-proposes-6-trillion-budget-will-money-flow-into-gold-2342 Gold surpassed $1,900 most recently – and it’s likely that the rally will continue for a while. Gold bulls have an opportunity to celebrate. As the chart below shows, the price of gold has been rising recently. And yesterday (May 26) it finally jumped above $1,900, which is an important psychological level. The question we should ask now is “what’s next?” Well, as the jokes go on, the price of gold will either go up or down. But in earnest, there are significant downside risks for the yellow metal. First of all, the Fed could overreact to rising inflation and increase real interest rates. However, these worries seem to be overblown. The Fed’s monetary policy is always asymmetrical, i.e., it eases its stance in response to recession more than it tightens it in response to inflation. The federal funds rate gets lower and stays at these low levels for longer, partially because of all the enormous indebtedness of the contemporary economy. The tapering is surely t... Tue, 25 May 2021 22:20:49 +0000 https://goldbroker.com/news/gold-surpasses-1900-usd-whats-next-2339 The latest IHS Markit Flash U.S. Composite PMI signals very fast economic expansion – but also strong inflationary pressure. Good news for gold, overall. On Friday, the recent IHS Markit Flash U.S. Composite PMI has been published. There are two pieces of news for gold - one good and one bad. Let’s start with the negative information. The report signals an unprecedentedly fast expansion in business activity in May. Indeed, the composite index surge from 63.5 in April to 68.1 this month established a new record. More importantly, both manufacturing and services sectors’ markets have shown strong growth. The former index rose from 60.5 in April to 61.5 in May (also a new record), while the PMI for services soared from 64.7 to 70.1, marking the sharpest jump since data collection for the series began in October 2009. Such an unprecedentedly fast acceleration of growth in the PMI signals strong economic growth, which is clearly bad news for the safe-havens such as gold (ho... Tue, 25 May 2021 14:04:34 +0000 https://goldbroker.com/news/rising-cost-pressure-what-will-mr-powell-and-mr-gold-do-2333 Gold recovered after a downward response to the surge in inflation. What’s next for the yellow metal? Gold rebounded after an initially bearish reaction to the BLS report showing that inflation soared 4.2% in April year-to-year. This means we have an inflation annual rate doubling the Fed’s target and the highest since the Great Recession as the chart below shows. It might now seem counterintuitive, but traders worried that the jump in the CPI would force the Fed to tighten its monetary policy earlier than anticipated. However, it seems that the US central bank managed to convince the markets that it would remain dovish for a very long period and that April’s inflation reading wouldn’t accelerate the first hike of the federal funds rate. Indeed, on Thursday, Federal Reserve Governor Christopher Waller said that the Fed would need “several more months of data” before considering modifications to its stance. He added “now is the time we need to be patient, steel... Tue, 18 May 2021 03:11:09 +0000 https://goldbroker.com/news/gold-rebounds-after-fainting-due-to-inflation-spike-2329 Gold jumped above $1,800, and it’s the disappointing jobs data that added fuel to the fire. The gold market is a funny place. On Thursday (May 6), I complained that the yellow metal couldn’t surpass $1,800: "The price of gold has been trading sideways recently as it couldn’t break out of the $1,700-$1,800 price range. This inability can be frustrating, but the inflationary pressure could help the yellow metal to free itself from the shackles." And voilà, just later that day, the price of gold finally jumped above $1,800, as the chart below shows. Hey, maybe I have to complain about gold more often? But jokes aside. The move is a big deal, as gold has finally broken above the key resistance level. What’s important here is that the breakthrough wasn’t caused by some negative geopolitical or economic shock, but rather by fundamental and sentiment factors. So, what happened? First, there is a weakness in the US dollar. With global economic recovery pro... Tue, 11 May 2021 15:05:15 +0000 https://goldbroker.com/news/gold-jumps-above-1800-whats-next-2316 New spending is coming! And because of that, Biden’s speech to Congress was fundamentally positive for gold. Last week was full of big events. The FOMC released its newest statement on monetary policy meeting, while Powell held the press conference. On the same day, President Joe Biden made his first speech to Congress. Let’s take a look at his words. First of all, Biden laid out his American Jobs Plan, which proposes more than $2 trillion to upgrade US infrastructure and create millions of jobs. No matter that infrastructure spending has no stimulus effect, according to economic research. Second, if you think that $2 trillion is a lot of money, given America’s huge indebtedness, you are clearly wrong. Two trillion is practically nothing and definitely not enough, so Biden proposed another $1.8 trillion American Family Plan in investments and tax credits to provide lower-income and middle-class families with inexpensive childcare. Third, Biden understands that all th... Tue, 04 May 2021 13:09:17 +0000 https://goldbroker.com/news/will-biden-build-back-better-gold-2307 The Fed left its monetary policy unchanged. However, the lack of any action amid economic recovery is dovish – good news for gold. On Wednesday (Apr. 28), the FOMC has published its newest statement on monetary policy . The statement wasn’t significantly altered. The main change is that the Fed has noticed the progress on vaccinations and strong policy support, and that, in consequence, the economic outlook has improved. Previously, the US central bank said that indicators of economic activity and employment “have turned up recently, although the sectors most adversely affected by the pandemic remain weak”, while now these indicators “have strengthened”, while “the sectors most adversely affected by the pandemic remain weak but have shown improvement”. So, the Fed acknowledged the fact that the economy has significantly recovered . Similarly, the US central bank is no longer considering the epidemic as posing “considerable” risks to the economic outlook. Instead, the... Wed, 28 Apr 2021 23:34:13 +0000 https://goldbroker.com/news/will-powell-lull-gold-bulls-to-sweet-sleep-2299 The price of gold rebounded further, despite hawkish Powell’s letter to Senator Rick Scott. The second quarter of 2021 started much better than the first one for the gold bulls. As the chart below shows, the yellow metal rebounded from the late March bottom of $1,684 to $1,778 on Tuesday (April 20). Is it a temporary recovery in a long, downward slide or a return to the bull market that started in 2019? Well, it’s probably too early to determine whether that’s the case. What is, however, crucial here is that the yellow metal has managed to go up, despite some bearish news. The most important fact is that Powell has replied to the letter from Senator Rick Scott on rising inflation and public debt. The Fed Chair’s reply was rather hawkish, as he said that any overshoot of inflation target would be limited: We do not seek inflation that substantially exceeds 2 percent, nor do we seek inflation above 2 percent for a prolonged period (…) we are fully committed to b... Mon, 19 Apr 2021 22:03:59 +0000 https://goldbroker.com/news/gold-continues-to-rebound-despite-hawkish-powells-letter-2279