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Scott Schamber
April 10, 2021

When Will Gold Bottom? And What is It With the US “Money Binge”?!

The prices of gold and silver have been in a bit of a retreat for some time now. Financial markets are bouncing back from the disastrous past year, becoming hugely optimistic once again. After all, the US Federal Reserve appears hell-bent on keeping rates where they are. For the new President, billions just aren’t enough anymore; Biden’s policies are entertaining, and enacting, ideas in the TRILLIONS. However, as inflation expectations continue to rise and the mountains of debt keep growing, why aren’t gold prices surging to new highs?

Financial markets seem to be making a strong economic comeback in 2021, following the turbulent last year that saw the pandemic rage. Optimism has been rife across stock, bond, and commodity markets, yet gold and silver prices have been retreating to lower and lower levels. The question on many investors’ minds is, when will they bottom?

The Big Picture

In the aftermath of the pandemic-induced lockdown, shifting (or rather, discharging) geopolitical tensions and the radical political changes in the US, financial markets have seen tremendous changes, mostly on the positive side. Yet, the bigger picture remains puzzling, to say the least.

The US government already unleashed am astronomical fiscal stimulus last year, but it would appear this was only the beginning, as spending is set to explode under President Biden. A stimulus package of $1.9 trillion was recently passed, including extensions of increased unemployment benefits, new child benefits, one-off cheques of $1.4 trillion and billions in aid to state and local governments. Not only has this package far exceeded expectations by global analysts, but it is also being disbursed at an unprecedented pace.

There is little doubt that that Biden’s aggressive stimulus measures will only be multiplied in the months and years to come. Quite frankly, the US seems to be on a free-money-for-all spending binge. The President is already preparing to inject another $2 trillion into the economy over the next few years, this time on infrastructure projects. This gigantic spending package is meant to transform not just roads and railways, but also energy, construction, communication, and education.

As is evident, all these monetary and fiscal excesses are set to accelerate the financial market rally. However, as the real economy is being injected with unprecedented amounts of stimulus cash, it seems relatively little is being said about the resulting inflation and rapidly growing deficits.

Fiscal Support by Region

Source: OECD Economic Outlook Database

Financial Markets Exude Optimism

Contrary to conventional wisdom (and common sense) that clearly sees inflation and growing deficits as harmful for the economy, the financial markets today appear to have embraced them. It seems the growing deficits and debts are perceived as irrelevant, or even purely positive. The reasons for this are manifold.

The new US administration is promoting its infrastructure plans as a necessary step to avoid being displaced by China as the global superpower. What this could entail is the setting up of or shifting of industries, corporate giants, and customer loyalty to the US, bringing in more profits. This means that the binge-spending by the US will only rein in more human, economic, and political capital in the long run.

US Spending on Infrastructure: Highway Trust Fund – Highway Account $bns

Source: Refinitiv Datastream / ECR Research

It is also clear that a lot of left-leaning pressure groups and lobbyists have pinned their hopes on President Biden to see their political goals furthered. From the infrastructural boost to changes in electoral laws and from minimum wage and tax hikes to immigration reform, a lot is expected of the new President. And though he is unlikely to take such bold and consequential policy steps all at once, the consensus is that all these pain points will be addressed soon enough which has led to an unparalleled, albeit possibly unrealistic, optimism.

This optimism, which may also be seen as naïve complacency from a bigger picture perspective, has helped suppress the price of gold despite the inflationary economic policies at play.

The Bottom is Near

There might be a good number of investors out there unable to figure out why gold has stalled despite rising inflation. The fundamental fact we must understand here is that gold is unlike other commodities because it is a monetary asset. The price of gold depends not just on market conditions, but also on the investors’ trust or distrust in governments and central banks. Besides, it is difficult to ascertain its worth as a store of value in instantaneous terms.

Add to this the fact that gold continues to be the most trusted form of money in terms of long-term investments. Even cryptocurrencies, which seem to have earned wider acceptance by the younger (and even older) generation, are yet to prove themselves over time.

No other currency has survived, except gold. Cryptos must prove themselves over time – and will be tested…but we still like gold on a long-term basis as a store of value.

~ Felix W. Zulauf, Zulauf Consulting

The current market situation – with low and declining real interest rates – is bullish for gold. However, these rates are rising in real and nominal terms, which means the medium-term indicators are still bearish. Therefore, it seems like another weak period could take prices to rock bottom within the next 3-6 weeks. This medium-term low could well be in sync with a temporary high for the US dollar. The present situation is rare and quite similar to 2014 when the percentage of bulls hit 0% and led to the final low.

The Way Forward

Tactically speaking, the fact that the bottom is near signals that a great buying opportunity is about to present itself. Although it might not set off the next bull cycle explicitly, there is every chance that gold prices will bounce back to new highs over the next few months. If you want a number, I expect the price to hit the US $2,300 per ounce within the next 12 months. Therefore, despite it being only an interim rally and not a cycle low, upcoming lows in the next 3-6 weeks still presents a great tactical opportunity for smart investment.

Why? Well, financial markets are likely going to hit a wall soon. The commodity market already seems highly overbought, with the coming months possibly bringing in more corrective activity in this complex. Gold is getting oversold too, and despite the low levels of interest, it is seeing rising nominal and real yields.

Besides, I don’t think the central bankers actually control the yields and inflation as much as some people tend to believe. If anything, the market seems to be in for a major surprise, which will most probably leave central bankers with egg on their face when the party is over. The same fate could be awaiting those wary investors who were caught by the now-viral trend of FOMO – Fear of Missing Out.

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