Commodity Trade Mantra

Rising Inflation & Sagging Confidence in Central Banks will Catapult Gold Prices Higher

Rising Inflation & Sagging Confidence in Central Banks will Catapult Gold Prices Higher

Rising Inflation & Sagging Confidence in Central Banks will Catapult Gold Prices Higher

The world is undergoing a major economic transition from deflation to inflation.  Sadly, very few retail investors are correctly positioned to benefit from this exciting change. In the big picture, the transition means that gold stocks will outperform physical gold prices, and bonds will stagnate. Chinese and Indian stock markets could boom.  Western stock markets could also get dragged higher, but investors there have a lot more risk than Chindia investors, says Stewart Thomson.

Rising oil prices are already putting pressure on the yield curve and the ten-year bond.  That’s likely to accelerate in 2017. Top economists at JP Morgan, Merrill Lynch, and other major financial institutions are all turning negative on bonds, and becoming very positive about commodities. These institutional money managers move truly gargantuan amounts of liquidity, and the early 2016 rally in gold stocks was the canary that sang loudly in the “inflation is coming” coal mine.

India could potentially achieve 10% GDP growth very soon, and 8% seems like a “walk in the park”.  As that growth continues relentlessly, commodities like oil (and especially uranium) are poised to benefit. 

From a fundamental perspective, gold prices need another rate hike from Janet to move higher.  In late 1979, rate hikes were negative for gold, but for most of the 1970s, gold prices went higher alongside rates, because inflation grew faster than interest rates. In the current situation, interest rate hikes are incredibly positive for gold prices, because of the existence of the huge QE “money ball” that sits at the Fed and other central banks.  Rate hikes incentivize banks to move that money out of the Fed and into the fractional reserve banking system.

Also supporting the view, an article that I saw at Bloomberg says: 

Rising inflation and sagging confidence in the ability of central banks to revive global growth will drive up gold prices, according to Incrementum AG, which says bullion could climb to a record in the next two years.

Consumer prices are set to rise as oil rebounds, while low or negative interest rates and bond buying by central banks have failed to boost economies, said Ronald Stoeferle, managing partner at the Liechtenstein-based company, which oversees 100 million Swiss francs ($101 million). Incrementum was the top precious metals forecaster last quarter, Bloomberg-compiled data show.

“Inflation may surprise to the upside and this will be the moment when you want to have some gold in your portfolio,” Stoeferle, 35, said in an interview. “Not the absolute level of inflation, but the momentum and the direction of inflation is the most important driver. In this uncharted territory, with big monetary experiments going on, it just makes sense” to hold bullion, he said.

Rising Inflation & Sagging Confidence in Central Banks will Catapult Gold Prices Higher

Gold prices had a momentous surge in the first half as the Federal Reserve stood pat on borrowing costs, negative interest rates spread in Europe and Japan and political risk climbed after the U.K. vote to leave the European Union. But the rally is unraveling with the metal posting its biggest weekly loss in almost a year on rising odds of a U.S. rate hike, increasing bond yields and deepening worries that some central banks have reached the limits of their effectiveness.

Price Worries

In a sign of rising inflation concerns, the difference between yields on 10-year U.S. notes and similar-maturity Treasury Inflation Protected Securities, a gauge of price expectations, expanded to as much as 1.69 percentage points on Tuesday, the widest since May. The Federal Reserve targets 2 percent inflation.

Gold prices could recover to $1,365 an ounce this year and even increase to above $2,000 in 2018, surpassing the all-time high of $1,921.17 in 2011, according to Stoeferle on Oct. 6. Bullion for immediate delivery traded at $1,255.98 at 8:15 a.m. in London on Wednesday.

Not everyone is as positive. The slump in gold prices could be the start of a bigger sell-off, according to Deutsche Bank AG Chief Global Strategist Binky Chadha this month, who believes that bullion is 20 to 25 percent overvalued. The probability of three rate hikes through the end of 2017 means there’s little room for rallies, according to Luc Luyet, a currencies strategist at Pictet Wealth Management, in August.

Singer, Einhorn

Stoeferle’s comments echo Elliott Management Corp.’s Paul Singer who in September said there’s a risk inflation could surprise everyone and that gold was underrepresented in portfolios. David Einhorn and Stan Druckenmiller have also given reasons for owning gold. Even as gold prices fell last week, investors raised holdings in exchange-traded funds to the highest in three years.

Stoeferle manages 32 million Swiss francs in the Austrian Economics Golden Opportunities Fund, which he started in 2014 with partner Mark Valek. The fund uses its own inflation indicator, which has given a strongly rising signal since the beginning of March. This has prompted them to invest in mining stocks, energy equities, commodities and commodity currencies, Stoeferle said.

Gold’s 3.3 percent drop on Tuesday last week was enough to turn some traders bearish, signalling that overall sentiment was far from positive, said Stoeferle, who publishes an annual report called “In Gold We Trust”. “From a sentiment perspective, it’s probably the most-hated bull market these days. This is only the beginning of this party.”

Gold Prices down Again, but We’re Betting on a Rebound

Remember one thing about markets, if you remember nothing else: Markets move up and down all the time. The mainstream media hates gold. We don’t know why for sure. So when gold prices move up and down, they make a big deal out of it. But here’s the thing, sure, gold prices are down 4% in the past week, says Kris Sayce. But year-to-date, are still up 18.3%.

Gold prices are volatile for one reason. Investors remain infatuated with the next US Federal Reserve interest rate decision. Today, the market has priced in a 63.6% chance of the Fed raising rates in December.

In our view, individuals and businesses won’t take kindly to it at all. Jobs and economic forecasts will fall short of expectations, and as they do, the chances of a rate rise will fall, and all else being equal, gold prices will rise.

It may be foolhardy, but we still consider the recent slump in gold prices as a buying rather than a selling opportunity.

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