What is happening to Gold and the Gold price?

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by Shaun Richards

It is time for us to check in on Gold and to note that whilst it is up just under 15% over the past year at US $1850 for the February futures contract it has hit a bit of a slump recently. Only a few days ago it was above US $1950 and back in early August last year it went as high as US $2089. One way of looking at things was expressed by Peter Schiff a few days ago.

To the extent that Bitcoin is actually taking any demand away from gold, that’s making Fed governors extremely happy. A rising #gold price is what central bankers fear most. #Bitcoin  is their best friend, which may explain why regulators aren’t in a hurry to help pop the bubble.

Actually central banks which have substantial gold reserves will be pleased and Bitcoin is far from their best friend. But the issue of Gold being replaced as a “safe haven” by Bitcoin is a live one as the tweet below indicates.

Even JPMorgan Chase has acknowledged that Bitcoin is taking market share from gold, the traditional haven asset. On Friday, one Bitcoin was worth more than 22 ounces of gold, which represents a new all-time high. ( @Cointelegraph)

In an article they went further.

According to multiple experts, one possible reason for Bitcoin’s remarkable recent price rise are massive investor outflows from another popular inflation hedge: gold.

Spot gold swooned over the past week, falling 4.62% to $1,857. The asset previously had been surging in unison with Bitcoin, which is up over 40% from $28,000 lows last week.

That narrative has had better Sunday nights and Monday mornings with Bitcoin some US $5800 lower at US $35,000 as I type this. But there is still some food for thought on the piece below.

The moves could be a sign of Bitcoin’s rising status as a legitimate asset class. Gold and Bitcoin have long been linked as both are seen as a way to protect wealth against inflation and macroeconomic uncertainty, but if the price movements over the last week are any indication, however, Bitcoin may be winning the narrative race.

The bull case for Gold

The macroeconomic uncertainty one is so clear we need spend little time with that but the inflation one is quite complex. It opens quite easily and as we recall my subject of Friday and this from Andrew Hauser of the Bank of England.

Since March of last year, G10 central bank balance sheets have risen by over $8 trillion.

In theoretical terms that should lead to inflation and a case for Gold but not so far.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in November on a seasonally adjusted basis after being unchanged in October,
the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.2 percent before seasonal adjustment. ( US BLS)

That seems likely to rise as we note a Brent Crude Oil price of around US $55 and the general outlook has led to this.

US Inflation Expectations (10-yr breakevens) continue their vertical ascent, now above 2% for the first time since November 2018. ( @charliebilello )

I counsel caution on the issue of inflation breakevens which are unreliable but the broad trend is useful. There is also the additional issue that official inflation measures are designed to avoid the areas where inflation is both most likely and most rampant.

​House prices rose nationwide in October, up 1.5 percent from the previous month, according to the latest Federal Housing Finance Agency House Price Index (FHFA HPI®).  House prices rose 10.2 percent from October 2019 to October 2020. The previously reported 1.7 percent price change for September 2020 remained unchanged.

Here we find that there has been a strong case for Gold with uncertainty extremely high and evidence of asset price inflation all around us. I could go further and look at the rise in the price of some equities such as the FAANGs and of course Tesla. Then there is the issue of the way bond prices have soared.

Also the example of the problems in Zimbabwe raise the issue of the supply of Gold.

HARARE (Reuters) – Gold sales to Zimbabwe’s sole buyer and exporter of bullion Fidelity Printers and Refiners (FPR) fell 31% to 19 tonnes last year after lower deliveries from small-scale miners, official data showed on Monday.

FPR pays U.S. dollars in cash to small-scale gold miners, but a shortage of hard cash caused delays in payments most of last year. That forced many of the miners to sell their gold to illegal buyers, industry officials say.

Deliveries of gold, the top foreign currency earner, have been on the decline since reaching a record 33.2 tonnes 2018, mainly due to delays by FPR in paying miners.

The Bear Case

One factor would be a turn in the trend for the US Dollar and maybe we are seeing that as recently it has regained a little of its losses. But underneath that I think there is a bigger factor in that we have seen something of a shift in US interest-rates. I do not mean the official US Federal Reserve one which remains around 0.1% I mean this.

US 10Y yield is 17bp higher on the week ahead of the Dec jobs report, having done this:

Jan 7 +4.4bp

Jan 6 +8.1bp

Jan 5 +4.2bp ( @business)

The ten-year yield in the US is now 1.11% and whilst that is low in historical terms it is up quite a bit since the 0.5% or so of last March. Also it is taking place in spite of the fact that the US Federal Reserve is buying some US $120 billion of bonds of which 2/3rds are Treasuries each month.

From Gold’s point of view there is no some sort of cost of carry albeit not much as we find ourselves in a bit of a twilight zone. If you look at the inflation trend and expectations then bond yields should go higher, but the counterpoint is whether the US Federal Reserve would then increase its purchasing rate. Indeed it could implement a type of Yield Curve Control and we are at yields where some have expected this to be deployed.

Comment

As you can see from the points above the Gold price is at something of a nexus point and one road is rather familiar.

Hello darkness, my old friend
I’ve come to talk with you again ( Paul Simon)

On it we are back to the central banks being in control again as it would involve even larger purchases of US government debt by the US Federal Reserve. That would certainly be convenient considering the fiscal plans.

Biden has called the current USD 600 round of cash a “down payment,” and early last week he said USD 2,000 checks would go out “immediately” if his party took control of both houses of Congress. ( Financial Express).

So in a type of ultimate irony the US Federal Reserve now has its hand on the tiller of prospects for the Gold price and we are back to Friday’s theme of central banks being our new overlords.

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