Gold on the move!
Friday, 7 May 2021
Lots of action in financial markets this week as gold managed to break north of USD$1,800 this week, with silver rising more than 4% this week to USD $27.30. A weaker US dollar and a flight to safety saw metals starting to react a bit more positively after a period of consolidation.
Gold’s performance has been hindered by the ETF investors that have been net-sellers in recent times, but with the weaker hands now largely out of the market we are seeing metals prices starting to recover.
Analysts at Commerzbank AG expect ETFs to begin registering net-inflows again in the second half of the year and they have a price target for USD $2,000 by year end, which would match that of Goldman Sachs. Gold miners also took a leg higher this week, confirming the bullish swing in sentiment.
The silver trend in the chart above looks to be gaining momentum. Lots of physical demand for silver globally is finally starting to follow through in the price breaking higher. From a technical perspective the 50-day moving average is closing in on the 200-day and just about ready to swing into a bullish formation. Indications are for the trend in silver to resume as investment demand for the metal remains incredibly high. Perth Mint once again have major issues keeping up with demand in the Australian market, but we can get allocations in small amounts here and there. It is better to call our offices if your interested in silver kilos as we often have a waiting list for kilo bars at present, and are getting allocations.
The above daily silver chart looks about as good as it gets from a technical standpoint, so don’t be surprised if we clear USD$28.00 shortly. Gold looking very nice from a technical perspective too after clearing $1,800 once again and making a quick trip to $1,820 at time of writing.
Janet Yellen made headlines this week talking up rate hikes, but I think the majority would say she’s a bit early with that call, as rates should remain accommodative until we see inflation in the US running well above the Feds target. Speaking of inflation, JP Morgans head quant, Marko Kalanovic has recently joined the bandwagon on calling for an inflationary period that would catch most asset managers off-guard.
We have talked about our expectations on inflation rising beyond a desirable level in recent updates and a summary of Kolanovics take via zerohedge is below:
Inflation hedging was a big theme in 2010. At the time, the Fed’s Quantitative Easing increased its balance sheet above $2T. Many investors thought it will inevitably lead to inflation. There was a rush to buy commodities, gold and other inflation hedges. However, the post-GFC recovery was weak, and new crises kept on emerging – the European sovereign debt crisis, EM and China crisis, global trade war, global manufacturing recession and global pandemic. As no inflation materialized over the past decade, inflation hedgers threw in the towel, and inflation-sensitive exposures were shorted as investors piled on deflationary themes (e.g., secular growth, low volatility, ESG, etc.). Driven by deflationary trends, bonds nearly doubled and the S&P 500 quadrupled since 2010, while Commodity indices significantly declined. Since 2010, the Fed’s balance sheet nearly quadrupled to $7.8T, and outside of the US, central banks instituted negative interest rates. Fiscal measures ranging from infrastructure to direct payments injected trillions. For instance, just this year, the new US administration proposed $6T of new stimulus measures.
With the end of pandemic this year – global growth, bond yields, and inflation are making a sharp turn. At the same time, easy monetary and fiscal policies will likely persist for a while. In addition, there are various temporary frictions related to supply chains, reopening, as well as political and business decisions that may compound inflation. On financial asset allocation, we expect the market to be late in recognizing the inflection, which we believe already happened in November last year.
... Kolanovic warns "that most portfolios are now vulnerable to a potential inflation shock."
The last statement by Kolanovic is very true. If you look across at asset prices today, the market is currently pricing in a complete economic recovery, the elimination of covid entirely, and no inflation. The Bond market just recently was the first to show jitters as investors started to get spooked in recent months, but the stock market marches on as if the world is surely going to be fine from this point onwards. When it comes to the CPI there is a logical argument that the way in which it is calculated is flawed and that it does not represent an accurate picture of prices rising across the whole economy, including asset prices. We have already seen most commodity prices surging; corn, cotton, lumber, copper, everything seems to be rising expect for the CPI.
For a look at inflation and its effects on precious metals prices in previous decades you can look to our recent update here. Although gold and silver have been lagging behind a lot of other commodities in recent months, we feel it is only a matter of time before we start to see a shift towards inflation protecting assets. If the 1970s teaches us anything, precious metals are the best thing to own under that environment.
Until next week,
Guardian Gold Sydney
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