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Rising inflation and geopolitical concerns boost gold

Commentaries & Views

Since posting an all-time high last August at $2089 per ounce, gold has seen persistently strong headwinds as the dollar and bond yields often surged on the argument that the U.S. economic recovery from the pandemic could exceed expectations. Despite the long-term bullish trend firmly intact after a 20% correction, the safe-haven metal has been ignored by investors as rallies in Bitcoin and equities have taken gold off their radar.

Gold's weakness persisted into the end of Q1 last month, even after the additional Covid-19 relief of $1.9 trillion was passed by Congress in March. The Biden administration's next plan for an infrastructure spending bill of $2.2 trillion being announced during the last month of Q1 has yet to have much of an impact on gold buying either.

But the insurmountable debt these programs are adding to, which government has no intention of ever paying down, has been getting more attention in Q2. This, along with rising inflation and geopolitical concerns, has seen the gold price finally seeing some sustained buying.

While economists have begun to raise warning flags about the ballooning size of U.S. government debt, which has reached 130% of its GDP, Federal Reserve Chair Jerome Powell this week said it is not a concern in the near term. In a webinar discussion hosted by the Economic Club of Washington, D.C. on Wednesday, Powell said that although the government debt was on an unsustainable path, the current level of debt is sustainable.

"The U.S. federal budget is on an unsustainable path, meaning simply that the debt is growing meaningfully faster than the economy," he said. "The current level of debt is very sustainable. And there's no question of our ability to service and issue that debt for the foreseeable future."

Of course, this last comment refers to the world's largest central bank continuing to participate in Modern Monetary Theory (MMT), which is the practice of printing as much money as politicians require for whatever purpose. And now that we are beginning to get inflation as the consequence of these actions, the solution is to tax the rich to slow it down.

But the main ingredient missing from MMT is the question of exponential debt. Certainly, the Fed can just create money to fund the government and it is confined by inflation to a certain extent. This is a true statement if taken by itself, however, you cannot then borrow with no intention of paying down the debt because the accumulative interest payments will end up representing 100% of the debt – and interest payments already represent 70% of total U.S. debt.

Furthermore, the Federal Reserve recently discontinued updating the M1 and M2 weekly money supply series and is instead updating these statistics monthly. The M1 supply, which includes monies that are very liquid such as cash, checkable (demand) deposits, and traveler's checks, has increased by 450% in one year. The M2 money supply, which is less liquid in nature and includes M1 plus savings and time deposits, certificates of deposits, and money market funds, is up 30% in the past year.

Last week's Producer Price Index (PPI) numbers showed that prices have been moving up more than twice as much as expected on a month-to-month basis during March. Annual inflation has jumped up to 4.2%, which is the highest figure since September, 2011. Yet, Fed Chair Jerome Powell insists with a straight face that any rise in inflation is likely to be "transitory", while discontinuing weekly updates to M1 and M2 money supply figures.

Steve Hanke, professor of Applied Economics of Johns Hopkins University, told Kitco last week that this action reflects a change in attitude from the world's largest central bank on the importance of looking at money supply. "Chairman Powell has very explicitly claimed that money doesn't matter in recent testimony. He's basically said that money and the measurement of money doesn't really matter because it's unrelated to inflation," Hanke said.

"In principle, they don't think [this data] is important. They want to deep-six the monetarists, basically and push them off to the sidelines. They want to bury Milton Friedman once and for all and be done with it, and their preference would probably to not report any monetary statistics," he said.

This week, plunging U.S. bond yields have also assisted in bringing investors back to gold. Market participants are betting the precious metal will recover its footing as an inflation hedge amid the trillions of dollars in stimulus spending already underway, or being planned, by the Biden administration.

Moreover, geopolitical tensions have begun to heat up recently. The White House said U.S. President Joe Biden voiced concern over the Russian buildup of troops along the Ukrainian border and "called on Russia to de-escalate tensions," during a phone call Tuesday with Russian President Vladimir Putin.

Amid these recent tensions, the U.S. sent two warships to the Black Sea this week and said they will remain there until May 4th. The U.S. Navy ships have made regular visits to the Black Sea in past years, vexing Moscow. Russian Deputy Foreign Minister Sergei Ryabkov denounced the latest deployment as "openly provocative," adding that "American ships have absolutely nothing to do near our shores."

The Biden administration also targeted Russia with sweeping sanctions and diplomatic expulsions on Thursday, to punish Moscow for interfering in last year's U.S. election, cyber hacking, bullying Ukraine, and other alleged "malign" actions. The United States warned Russia that more penalties were possible but also said it did not want to escalate.

"I had people calling to buy gold for two reasons today: The first is the sanctions and the other was the plunge in bond yields," said Phillip Streible on Thursday, who is a market strategist for precious metals at Chicago's Blue Line Futures.

These factors have combined to push gold prices higher this week, breaking through resistance which is now support near its 50-day moving average at $1,753. Once we see a weekly close above $1775, the odds will increase that the daily double-bottom below $1680 reached at the end of March signified an end to the 8-month correction in an on-going bull market in gold.

Meanwhile, after a 30% correction during an equally long decline, the GDX will log a break of its downtrend resistance line once the global miner ETF can close above $36 on a weekly basis. As I brought to your attention last week, the miners began to show some relative strength to the gold price to begin Q2, while many quality juniors that became oversold after strong moves into the August 2020 high are forming bottoming patterns.

With many quality juniors having corrected 50% after making huge moves into last August, this is a good time for precious metals stock speculators to position themselves into a basket of quality juniors before the next gold up-leg begins in earnest. If you require assistance in doing so, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.