With Stagflation Ahead, How Will Gold Respond?

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From Birch Gold Group

How Will Gold Price Perform During Stagflation?

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Analysts say gold is eyeing stagflation, gold in times of war and peace, and the rundown of the debt ceiling situation.

Analysts think stagflation might be the boost gold needs right now

The gold market continues to experience strange action, having most recently fallen to $1,720 only to bounce back to $1,760 by Friday’s time. It was a repeat of the week before, where strong selling pressure was met with a lot of buyers.

Kitco interviewed a number of market analysts for their take on the bigger economic picture and how gold will respond. Daniel Ghali, a commodity strategist at TD Securities, told Kitco that the headwinds gold seems to be facing come primarily in the form of the markets pricing in scenarios that may or may not happen:

What’s been driving gold these days is market pricing of Fed’s exit. Both the tapering and a potential rate hike on the horizon were being priced in. As a result of that, we’ve seen substantial repricing of the Treasury markets, and that has been primarily weighing on gold.

Even though it has been consistently pointed out that the Fed is poorly positioned for either tapering or rate hikes, the markets seem determined not to be surprised.

Ghali thinks the re-emergence of the threat of stagflation, a mixture of rising prices and a static or weakening economy, could be a wake-up call to market participants. Indeed, there seems to be little to support the idea of any kind of economic strength that would cause the Fed to act in a hawkish manner, and worries over inflation are by now ubiquitous.

Walsh Trading co-director Sean Lusk reiterated that gold ended the week with a bullish note:

The U.S. dollar is taking a breather, bond yields are coming back down. There is going to be another inflationary vibe. There are a lot of supply chain issues. As we get into the fourth quarter of the year, we’ll get a new round of data and a new round of earning results.

Lusk thinks general uncertainty and disappointing data are key factors that could drive gold back towards at least $1,835 by the end of the year. (Rising oil prices or an upsurge in pandemic panic would contribute significantly, he observed.)

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If gold is a “barbarous relic,” why do central banks own so much?

Forbes contributor Clem Chambers has taken note of some investors, but more so governments around the world, frequently dismissing gold in some way. When it’s not being called a relic, the official sector seems to ignore it, almost as if it isn’t a serious investment as opposed to stocks and bonds.

However one feels about the adage that actions speak louder than words, it can’t be dismissed in the case of gold bullion. Sovereign nations around the world continue to hoard it in their vaults and, unlike the Fed, many of them won’t mince words about why they’re doing so. The example of Russia spearheading official sector purchases by a wide margin for years highlights Chambers’ notion that gold is what every nation wants to own during times of war.

Russia has long been at odds with the U.S., and its massive gold hoard has enabled it to lessen U.S. dollar dependence, support its own shaky currency and avoid sanctions. No missile needs to be launched for a country to perceive it is under assault and stockpile gold for the very same reason that investors do.

Wars bring about currency devaluation, inflation, scarcity and unfulfilled government promises. All of these factors are very much a prominent theme right now, which is likely why individual physical gold investment took off in a big way last year and is still trending. As always, the physical and paper gold market seem close to uncorrelated, an issue that the Basel agreement is trying to rectify, but probably won’t so easily.

One only needs to remember how the gold standard was formally abolished in the U.S., amid a war effort that had countries calling the dollar overvalued. Hyperinflation, along with gold repatriations and de-dollarization, followed. For an asset that is called outdated by many, it continues to hold a conspicuous amount of clout on the geopolitical stage.

The debt ceiling is going up, and for some reason, gold isn’t reacting

As seen on investing.com, for all the abnormalities we are witnessing from the government, one thing has hardly changed: it is running out of money. Treasury Secretary Janet Yellen said as much recently, listing October 18 as the date when precisely that will happen unless the debt ceiling is raised.

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With the latest bill to fund the government until the end of the year, it’s more or less set in stone that the government will simply raise the debt ceiling as it has in the past with its classic “deal with this later” approach. It might do that in the literal sense with a debt ceiling suspension.

Despite the clear dire straits of such a massive sovereign and federal debt coupled with a free-floating currency, the markets don’t seem worried, as gold has hardly reacted. Just the opposite, as it fell due to various optimistic expectations. But is this really of any concern to gold investors?

Whatever high gold reaches, even if the market is being called a bubble, that level ends up being a long-forgotten support. The 30-year gold chart should be a staple for any gold investor. The all-time high of $1,000 in early 2008, the fall to $700 in late 2008, the all-time high of $1,910 in 2011 and the fall to $1,050 in 2015.

Within seven years, the previous all-time high became the kind of support that had non-believers losing their mind. We are in such unprecedented waters that there is simply no forecasting of gold’s price based on history.

Betting against gold has always proven foolhardy. Given the muddiness of these waters, it’s likely to prove all the more so down the line.

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