Short-term Gold Outlook


Gold is highly correlated to real rates. Lately, it has become evident the inflationary pressures stemming from the supply bottlenecks are likely to stay around a bit longer than originally anticipated. The inflation-linked bond index (TIPS) has sold off lately but remains well above where it started in January 2021. The nominal bond yields (black dotted line) sold off lately, and many argue that the bond yield is anticipating higher inflation and that Gold should rally to catch up with the higher inflation-linked bond index.

With the imminent “Taper-statement” we must consider what happened in May 2013 when the Bernanke “Taper” statement caught the markets on the wrong foot. The gold price peaked in October 2012, long before the inflation-linked bond index turned down in May 2013. The “Taper-statement” is by its very nature a disinflationary event as it shrinks the monetary base. Bonds sold off in 2013 due to supply concerns as the largest bond buyer was standing back. Therefore, we recommend that we take the current signal we get from the bond market with a pinch of salt until we get more information on how the markets would react to the “Taper-statement”.

Long-term Gold outlook


On the long-term chart above, you can see how closely Gold is tied to inflation-linked bonds and projected inflation rather than reported inflation. This brings us to one of the most debated issues currently: Is the world experiencing an inflationary cycle like it did in the 1970’s?

Our view is, no, this is a price shock as was the case during the Great Financial Crisis. The CPI basket does not cause inflation; it is simply a way of measuring the value of money. Inflation is caused by the constant debasement of money and it is easy to believe that this is the situation right now with the QE program. The central banks, on the other hand, control less than 10% of the entire money supply in a highly geared fractional banking system with the shadow banking system joined to the traditional banking system. If the central bank in Zimbabwe prints money it immediately leads to inflation as it is a cash-based financial system, however, the global financial system is credit-based, and not cash-based.

The moment the Fed tapers to try and bring everything back to normal we would expect a sharp correction and eventually, the supply bottlenecks will clear and the inflationary concern would dissipate.

US and Japan Broad Money Supply


The inflation of the 1970’s went hand-in-hand with strong money supply growth. Since then, the peaks in money supply growth were lower after every cutting cycle or stimulus the Fed added.

The US economic growth had a similar pattern, and growth never returned to previous highs. There was a major break higher last year and therefore many believe this disinflationary period is over. We are not convinced – the global monetary and fiscal response to the pandemic was in the region of 25% of global GDP. We need more evidence that the money multiplier is working again and that the demand for debt – which has been absent for the last decade – is back.

After the property bubble burst in1989, Japan’s money supply growth struggled to recover. The broad money supply in Japan spiked higher last year but is now rapidly declining and the same conclusion applies: we need more evidence that the economy can stand on its own feet without government support.

We believe the demographic trends are against sustainable debt growth in the developed markets. Bond yields will rise if these trends continue, derailing the global financial system – which is geared more than 300% – killing the recovery. We therefore believe the inflationary pressures will dissipate over the next few months.