Gold has broken above a key number of $1,900 this morning, and silver
continues to surge, approaching $23.00. Gold is now just over $20 away from
its all time high, which is $1921.18. The question on many people’s mind,
especially potential buyers, is whether this will continue. Here are some
factors to look at on how and why we got here and going forward.
Is stimulus really painless? In the face of the pandemic, governments around the world have unleashed a very significant amount of cash into their respective economies, in the form of unemployment benefits and business grants/loans. Much of modern economic theory postulates that money creation is the right of government and it can do so with little consequence. This is true as long as faith remains in the fiat currency and inflation is kept at a target level using policy tools. Today the U.S. dollar, as measured by the Bloomberg Dollar Index, fell to its lowest point since January. We can also see in the chart below that since March the dollar has weakened considerably vs. gold but has strengthened vs. other fiat currencies. We may be reaching a tipping point in which there is simply too much cash sloshing around in the system, making the potential for runaway inflation real. Gold and silver are the primary way to preserve purchasing power against a falling currency.
Following on from the above point, a huge increase in the money supply puts
pressure on interest rates, to where we now have a situation where $14.9
trillion worth of sovereign bonds yield a negative interest rate. Spot gold
has closely tracked the global aggregate negative yielding debt market
value and it has also very closely tracked the U.S. 10-year Treasury
inverse yield (spot gold increasing as yield falls.)
Gold supply chain issues. Covid-19 put considerable strain on the gold
supply chain. Gold mines around the world halted production, either
voluntarily or via government order, and travel restrictions both limiting
the supply of gold in its early stages. Refineries were then shut down for
the same reasons. This created a shortage of metal in the major physical
markets right when demand was starting to surge. This created near-record
high premiums for both forward futures contracts and product, such as coins
and bars. One of the key elements to solve is to figure out how much of
spot price increase is because of these supply constraints, and if gold
spot will contract once full supply is restored.
Author: Patrick Ian Perez