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Table of contents

  1. Implications for Gold

    Santa Claus is coming to town! What will he give gold: a gift or a rod?

    During the holiday week, not much happens in the marketplace. Investors focus on two things right now: whether Democrats will be able to pass Biden’s spending bill in the face of Senator Joe Manchin’s opposition, and whether the coronavirus Omicron variant will trigger new restrictions and hamper economic growth. After all, this strain has already become the dominant one in the US, but its effects are not yet known.

    Like most of 2021, gold has been rubbing against $1,800 this week but did not have the strength to permanently rise above this level. Despite a surge in inflation and very low real interest rates, the yellow metal didn’t rally. Thus, we could say that gold was rather naughty this year and doesn’t deserve gifts from Santa.

    However, maybe it’s not gold’s fault, but our too high expectations? After all, gold had to compete with cryptocurrencies and industrial metals (or commodities in general), both of which performed exceptionally well during periods of high inflation. Despite all the Fed’s hawkish rhetoric and tapering of quantitative easing, gold didn’t break down.

    Hence, it all depends on the perspective. The same applies to historical analyses and forecasts for 2022. The bears compare the current situation with the 2011-2013 period. The 2020 peak looked like the 2011 peak. Thus, after a period of consolidation, we could see a big decline, just as it happened in 2013.

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    On the other hand, gold bulls prefer to compare today with 2015, as we are only a few months away from the Fed’s interest rate hikes. As a reminder, gold bottomed in December 2015, so the hope is that we will see another bottom soon, followed by an upward move. In other words, the bears believe that the replay of the “taper tantrum” is still ahead of us, while the bulls claim that the worst is already behind us.

     

    Implications for Gold

    Who is right? Of course, me! But seriously: both sides make valid points. Contrary to 2013, the current tapering was well telegraphed and well received by the markets. Thus, the worst can indeed be already behind us. Especially that the 2020 economic crisis was very deep, but also very short, so everything was very condensed. I mean: the Great Recession lasted one and a half years, while the Great Lockdown lasted only two months. The first taper tantrum occurred in 2013, while the first hike in the federal funds rate – at the end of 2015. We won’t wait that long now, so the period of downward pressure on gold prices stemming from expectations of the Fed’s tightening cycle will be limited.

    Having said that, gold bears highlight an important point: real interest rates haven’t normalized yet. As the chart below shows, although nominal bond yields have rebounded somewhat from the August 2020 bottom, real rates haven’t followed. The reason was, of course, the surge in inflation. However, if inflation eases, inflation-adjusted rates will go up. Additional risk here is that the Fed will surprise the markets on a hawkish side.

    gold christmas tree grafika numer 1

    The bottom line is that Santa Claus may bring gold a rod this time. Although gold’s reaction to the recent FOMC meeting was solid, the overall performance of the yellow metal this month is worse compared to the historically strong action in December. I don’t expect a similarly strong downward move as in 2013, but real interest rates could normalize somewhat in 2022, given the upcoming Fed’s tightening cycle and possible peak in inflation. The level of indebtedness will limit the scope of the move, but it won’t change the direction.

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    Anyway, whether you are a gold bull or a gold bear, I wish you a truly merry and golden Christmas (or just winter holidays)! Let the profits shine, even if gold won’t!

    If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Effective Investment through Diligence & Care


    Arkadiusz Sieron

    Arkadiusz Sieron

    Hi, my name is Arkadiusz Sieroń. Call me a liar, but I am writing about the precious metals thanks to Arthur Laffer, Alan Greenspan, John Keynes and Fredrich Hayek. Really! Would you like to know how these economists, some of whom have been dead for a long time, triggered my adventure with gold? When I was in high school, I took part in the Entrepreneurship Olympic, one of the biggest thematic competitions for pupils from secondary schools. During my preparations, I studied an academic textbook, in which I came across a Laffer curve. Eureka! If the tax revenues are the same at low and high tax rates, the government should lower them! I did not win the competition, but I achieved much more. I decided to become an economist! And I loved the idea of small government and economic freedom since that very moment. After graduating from high school, I moved to the capital. I was very excited, as I started to study economics at the best economics university in the country. However, the professors disappointed me very quickly. Why? They all were statists, supporting extensive government intervention and fiat currencies. Gold? It is a barbarous relic! Have you not read Lord Keynes? I was very depressed. I even considered giving up my studies in economics and enrolling in the Philosophy Faculty! You can see now that I was really desperate. When I was contemplating nothingness and vanity of vanities, a few of my classmates lent me a handful of fascinating books, such as Capitalism and Freedom by Milton Friedman. I also discovered the publications of the Austrian economists who supported the idea of the gold standard. It sounded crazy in the 21th century, but it was inspiring. I rediscovered the sense of studying economics. I continued my studies and one day I read these words: “Gold and economic freedom are inseparable”. Try guess who wrote them. Don’t give up, try once again. Don’t know? Alan Greenspan. Shocking, right? This is a quote from his “Gold and Economic Freedom”, an article published in 1966. Several years before he became the Fed Chair, and several more before the real estate bubble, that he helped to pump, up burst. Quite ironic, don’t you think? Both his essay and the Great Recession (and the accompanying bull market) motivated me to study investment portfolio management and the precious metals. I became a certified Investment Adviser very soon and I started to work for the biggest pension fund in the country. My corporate career seemed to be very promising. However, I quickly discovered that the company invested most of the participants’ funds into Treasuries or shares of the big state companies. And they didn’t even want to hear about investing in precious metals. I quit. I found a shelter at the university, as a Ph.D. candidate and – after a defense of my thesis about certain negative consequences of inflation (i.e. the Cantillon effect) – as an Assistant Professor. I was finally free to study economics, freedom, and gold. The more I read about gold, the more I was terrified. Most of the so-called experts who write about the precious metals, don’t have any idea about the subject they discuss. They treat gold as a mere commodity. Or they claim that gold is either worthless as it does not bring any yield or that its price should always rise. I was really let down by the state of understanding of the gold market among the analysts and investors. But I could not do too much. Until the sun shined down on me. I got a job offer at Sunshine Profits. I didn’t hesitate a second and accepted it, although many professors discouraged me: “You are a scholar, focus on science and do not write silly newsletters about bullion" -they advised me. But I did not listen to them, as they clearly didn’t understand the nature of gold. It is not a barbarous relic, it is the longest used money in history, and a clinking witness of human civilization. Gold is the asset, which used to serve as the safe- haven and portfolio diversifier for investors from the entire world for years. I wanted to study its properties and to share with my knowledge with people who do not have time for that. I wanted to help investors to better understand fundamentals of the gold market and improve their investment decisions. I’m happy that I can do that at Sunshine Profits. I’m really proud to be a member of our team and provide investors with high quality investment analyses about the gold market.


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