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.

GOLD – Potential Bullish Reversal!

Can Disinflation Support A Decline Of Price Of Gold?

Arkadiusz Sieron Arkadiusz Sieron 18.03.2022 15:13
  Inflation continues to rise but may soon reach its peak. After that, its fate will be sealed: a gradual decline. Does the same await gold?If you like inviting people over, you’ve probably figured out that some guests just don’t want to leave, even when you’re showing subtle signs of fatigue. They don’t seem to care and keep telling you the same not-so-funny jokes. Even in the hall, they talk lively and tell stories for long minutes because they remembered something very important. Inflation is like that kind of guest – still sitting in your living room, even after you turned off the music and went to wash the dishes, yawning loudly. Indeed, high inflation simply does not want to leave. Actually, it’s gaining momentum. As the chart below shows, core inflation, which excludes food and energy, rose 6.0% over the past 12 months, speeding up from 5.5% in the previous month. Meanwhile, the overall CPI annual rate accelerated from 7.1% in December to 7.5% in January. It’s been the largest 12-month increase since the period ending February 1982. However, at the time, Paul Volcker raised interest rates to double digits and inflation was easing. Today, inflation continues to rise, but the Fed is only starting its tightening cycle. The Fed’s strategy to deal with inflation is presented in the meme below. What is important here is that the recent surge in inflation is broad-based, with virtually all index components showing increases over the past 12 months. The share of items with price rises of over 2% increased from less than 60% before the pandemic to just under 90% in January 2022. As the chart below shows, the index for shelter is constantly rising and – given the recent spike in “asking rents” – is likely to continue its upward move for some time, adding to the overall CPI. What’s more, the Producer Price Index is still red-hot, which suggests that more inflation is in the pipeline, as companies will likely pass on the increased costs to consumers. So, will inflation peak anytime soon or will it become embedded? There are voices that – given the huge monetary expansion conducted in response to the epidemic – high inflation will be with us for the next two or three years, especially when inflationary expectations have risen noticeably. I totally agree that high inflation won’t go away this year. Please just take a look at the chart below, which shows that the pandemic brought huge jumps in the ratio of broad money to GDP. This ratio has increased by 23%, from Q1 2020 to Q4 2021, while the CPI has risen only 7.7% in the same period. It suggests that the CPI has room for a further increase. What’s more, the pace of growth in money supply is still far above the pre-pandemic level, as the chart below shows. To curb inflation, the Fed would have to more decisively turn off the tap with liquidity and hike the federal funds rate more aggressively. However, as shown in the chart above, money supply growth peaked in February 2021. Thus, after a certain lag, the inflation rate should also reach a certain height. It usually takes about a year or a year and a half for any excess money to show up as inflation, so the peak could arrive within a few months, especially since some of the supply disruptions should start to ease in the near future. What does this intrusive inflation imply for the precious metals market? Well, the elevated inflationary pressure should be supportive of gold prices. However, I’m afraid that when disinflation starts, the yellow metal could suffer. The decline in inflation rates implies weaker demand for gold as an inflation hedge and also higher real interest rates. The key question is, of course, what exactly will be the path of inflation. Will it normalize quickly or gradually, or even stay at a high plateau after reaching a peak? I don’t expect a sharp disinflation, so gold may not enter a 1980-like bear market. Another question of the hour is whether inflation will turn into stagflation. So far, the economy is growing, so there is no stagnation. However, growth is likely to slow down, and I wouldn’t be surprised by seeing some recessionary trends in 2023-2024. Inflation should still be elevated then, creating a perfect environment for the yellow metal. Hence, the inflationary genie is out of the bottle and it could be difficult to push it back, even if inflation peaks in the near future. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
Despite Ultra-Hawkish Fed’s Meeting, Gold Jumps

Despite Ultra-Hawkish Fed’s Meeting, Gold Jumps

Arkadiusz Sieron Arkadiusz Sieron 17.03.2022 17:29
  The FOMC finally raised interest rates and signaled six more hikes this year. Despite the very hawkish dot plot, gold went up in initial reaction. There has been no breakthrough in Ukraine. Russian invasion has largely stalled on almost all fronts, so the troops are focusing on attacking civilian infrastructure. However, according to some reports, there is a slow but gradual advance in the south. Hence, although Russia is not likely to conquer Kyiv, not saying anything about Western Ukraine, it may take some southern territory under control, connecting Crimea with Donbas. The negotiations are ongoing, but it will be a long time before any agreement is reached. Let’s move to yesterday’s FOMC meeting. As widely expected, the Fed raised the federal funds rate. Finally! Although one Committee member (James Bullard) opted for a bolder move, the US central bank lifted the target range for its key policy rate only by 25 basis points, from 0-0.25% to 0.25-0.50%. It was the first hike since the end of 2018. The move also marks the start of the Fed’s tightening cycle after two years of ultra-easy monetary policy implemented in a response to the pandemic-related recession. In support of these goals, the Committee decided to raise the target range for the federal funds rate from 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. It was, of course, the most important part of the FOMC statement. However, the central bankers also announced the beginning of quantitative tightening, i.e., the reduction of the enormous Fed’s balance sheet, at the next monetary policy meeting in May. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting. It’s also worth mentioning that the Fed deleted all references to the pandemic from the statement. Instead, it added a paragraph related to the war in Ukraine, pointing out that its exact implications for the U.S. economy are not yet known, except for the general upward pressure on inflation and downward pressure on GDP growth: The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity. These changes in the statement were widely expected, so their impact on the gold market should be limited.   Dot Plot and Gold The statement was accompanied by the latest economic projections conducted by the FOMC members. So, how do they look at the economy right now? As the table below shows, the central bankers expect the same unemployment rate and much slower economic growth this year compared to last December. This is a bit strange, as slower GDP growth should be accompanied by higher unemployment, but it’s a positive change for the gold market. What’s more, the FOMC participants see inflation now as even more persistent because they expect 4.3% PCE inflation at the end of 2022 instead of 2.6%. Inflation is forecasted to decline in the following years, but only to 2.7% in 2023 and 2.3% in 2024, instead of the 2.3% and 2.1% seen in December. Slower economic growth accompanied by more stubborn inflation makes the economy look more like stagflation, which should be positive for gold prices. Last but not least, a more aggressive tightening cycle is coming. Brace yourselves! According to the fresh dot plot, the FOMC members see seven hikes in interest rates this year as appropriate. That’s a huge hawkish turn compared to December, when they perceived only three interest rate hikes as desired. The central bankers expect another four hikes in 2024 instead of just the three painted in the previous dot plot. Hence, the whole forecasted path of the federal fund rate has become steeper as it’s expected to reach 1.9% this year and 2.8% next year, compared to the 0.9% and 1.6% seen earlier. Wow, that’s a huge change that is very bearish for gold prices! The Fed signaled the fastest tightening since 2004-2006, which indicates that it has become really worried about inflation. It’s also possible that the war in Ukraine helped the US central bank adopt a more hawkish stance, as if monetary tightening leads to recession, there is an easy scapegoat to blame.   Implications for Gold What does the recent FOMC meeting mean for the gold market? Well, the Fed hiked interest rates and announced quantitative tightening. These hawkish actions are theoretically negative for the yellow metal, but they were probably already priced in. The new dot plot is certainly more surprising. It shows higher inflation and slower economic growth this year, which should be bullish for gold. However, the newest economic projections also forecast a much steeper path of interest rates, which should, theoretically, prove to be negative for the price of gold. How did gold perform? Well, it has been sliding recently in anticipation of the FOMC meeting. As the chart below shows, the price of the yellow metal plunged from $2,039 last week to $1,913 yesterday. However, the immediate reaction of gold to the FOMC meeting was positive. As the chart below shows, the price of the yellow metal rebounded, jumping above $1,940. Of course, we shouldn’t draw too many conclusions from the short-term moves, but gold’s resilience in the face of the ultra-hawkish FOMC statement is a bullish sign. Although it remains to be seen whether the upward move will prove to be sustainable, I wouldn’t be surprised if it will. This is what history actually suggests: when the Fed started its previous tightening cycle in December 2015, the price of gold bottomed out. Of course, history never repeats itself to the letter, but there is another important factor. The newest FOMC statement was very hawkish – probably too hawkish. I don’t believe that the Fed will hike interest rates to 1.9% this year. And you? It means that we have probably reached the peak of the Fed’s hawkishness and that it will rather soften its stance from then on. If I’m right, a lot of the downward pressure that constrained gold should be gone now. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
XAUUSD Decreases, Russia-Ukraine Conflict Remains, Fed Decides

XAUUSD Decreases, Russia-Ukraine Conflict Remains, Fed Decides

Arkadiusz Sieron Arkadiusz Sieron 15.03.2022 14:13
  It seems that the stalemate in Ukraine has slowed down gold's bold movements. Will the Fed's decision on interest rates revive them again?  The tragedy continues. As United Nations Secretary-General António Guterres said yesterday, “Ukraine is on fire and being decimated before the eyes of the world.” There have already been 1,663 civilian casualties since the Russian invasion began. What is comforting in this situation is that Russian troops have made almost no advance in recent days (although there has been some progress in southern Ukraine). They are attempting to envelop Ukrainian forces in the east of the country as they advance from the direction of Kharkiv in the north and Mariupol in the south, but the Ukrainian Armed Forces continue to offer staunch resistance across the country. So, it seems that there is a kind of stalemate. The Russians don’t have enough forces to break decisively through the Ukrainian defense, while Ukraine’s army doesn’t have enough troops to launch an effective counteroffensive and get rid of the occupiers. Now, the key question is: in whose favor is time working? On the one hand, Russia is mobilizing fighters from its large country, but also from Syria and Nagorno-Karabakh. The invaders continue indiscriminate shelling and air attacks that cause widespread destruction among civilian population as well. On the other hand, each day Russian army suffers heavy losses, while Ukraine is getting new weapons from the West.   Implications for Gold How is gold performing during the war? As the chart below shows, the recent stabilization of the military situation in Ukraine has been negative for the yellow metal. The price of gold slid from its early March peak of $2,039 to $1,954 one week later (and today, the price is further declining). However, please note that gold makes higher highs and higher lows, so the outlook remains rather positive, although corrections are possible. On the other hand, gold’s slide despite the ongoing war and a surge in inflation could be a little disturbing. However, the reason for the decline is simple. It seems that the uncertainty reached its peak last week and has eased since then. As the chart below shows, the CBOE volatility index, also called a fear index, has retreated from its recent peak. The Russian troops have made almost no progress, the most severe response of the West is probably behind us, and the world hasn’t sunk into nuclear war. Meanwhile, the negotiations between Russia and Ukraine are taking place, offering some hope for a relatively quick end to the war. As I wrote last week, “there might be periods of consolidation and even corrections if the conflict de-escalates or ends.” The anticipation of tomorrow’s FOMC meeting could also contribute to the slide in gold prices. However, the chart above also shows that credit spreads, another measure of risk perception, have continued to widen in recent days. Other fundamental factors also remain supportive of gold prices. Let’s take, for instance, inflation. As the chart below shows, the annual CPI rate has soared from 7.5% in January to 7.9% in February, the largest move since January 1982. Meanwhile, the core CPI, which excludes food and energy prices, surged from 6.0% to 6.4% last month, also the highest reading in forty years. The war in Ukraine can only add to the inflationary pressure. Prices of oil and other commodities have already soared. The supply chains got another blow. The US Congress is expanding its spending again to help Ukraine. Thus, the inflation peak would likely occur later than previously thought. High inflation may become more embedded, which increases the odds of stagflation. All these factors seem to be fundamentally positive for gold prices. There is one “but”. The continuous surge in inflation could prompt monetary hawks to take more decisive actions. Tomorrow, the FOMC will announce its decision on interest rates, and it will probably hike the federal funds rate by 25 basis points. The hawkish Fed could be bearish for gold prices. Having said that, historically, the Fed’s tightening cycle has been beneficial to the yellow metal when accompanied by high inflation. Last time, the price of gold bottomed out around the liftoff. Another issue is that, because of the war in Ukraine, the Fed could adopt a more dovish stance and lift interest rates in a more gradual way, which could be supportive of gold prices. The military situation in Ukraine and tomorrow’s FOMC meeting could be crucial for gold’s path in the near future. The hike in interest rates is already priced in, but the fresh dot-plot and Powell’s press conference could bring us some unexpected changes in US monetary policy. Stay tuned! 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, PhDSunshine Profits: Effective Investment through Diligence & Care
The War Is on for Two Weeks. How Does It Affect Gold?

The War Is on for Two Weeks. How Does It Affect Gold?

Arkadiusz Sieron Arkadiusz Sieron 10.03.2022 17:21
  With each day of the Russian invasion, gold confirms its status as the safe-haven asset. Its long-term outlook has become more bullish than before the war. Two weeks have passed since the Russian attack on Ukraine. Two weeks of the first full-scale war in Europe in the 21th century, something I still can’t believe is happening. Two weeks of completely senseless conflict between close Slavic nations, unleashed without any reasonable justification and only for the sake of Putin’s imperial dreams and his vision of Soviet Reunion. Two weeks of destruction, terror, and death that captured the souls of thousands of soldiers and hundreds of civilians, including dozens of children. Just yesterday, Russian forces bombed a maternity hospital in southern Ukraine. I used to be a fan of Russian literature and classic music (who doesn’t like Tolstoy or Tchaikovsky?), but the systematic bombing of civilian areas (and the use of thermobaric missiles) makes me doubt whether the Russians really belong to the family of civilized nations. Now, for the warzone report. The country’s capital and largest cities remain in the hands of the Ukrainians. Russian forces are drawing reserves, deploying conscript troops to Ukraine to replace great losses. They are still trying to encircle Kyiv. They are also strengthening their presence around the city of Mykolaiv in southern Ukraine. However, the Ukrainian army heroically holds back enemy attacks in all directions. The defense is so effective that the large Russian column north-west of Kyiv has made little progress in over a week, while Russian air activity has significantly decreased in recent days.   Implications for Gold How has the war, that has been going on for already two weeks, affected the gold market so far? Well, as the chart below shows, the military conflict was generally positive for the yellow metal, boosting its price from $1,905 to $1989, or about 4.4%. Please note that initially the price of gold jumped, only to decline after a while, and only then rallied, reaching almost $2,040 on Tuesday (March 8, 2022). However, the price has retreated since then, below the key level of $2,000. This is partially a normal correction after an impressive upward move. It’s also possible that the markets are starting to smell the end of the war. You see, Russian forces can’t break through the Ukrainian defense. They can continue besieging cities, but the continuation of the invasion entails significant costs, and Russia’s economy is already sinking. Hence, they can either escalate the conflict in a desperate attempt to conquer Kyiv – according to the White House, Russia could conduct a chemical or biological weapon attack in Ukraine – or try to negotiate the ceasefire. In recent days, the President of Ukraine, Volodymyr Zelensky, said he was open to a compromise with Russia. Today, the Russian and Ukrainian foreign ministers met in Turkey for the first time since the horror started (unfortunately, without any agreement). However, although gold prices may consolidate for a while or even fall if the prospects of the de-escalation increase, the long-term fundamentals have turned more bullish. As you can see in the chart below, the real interest rates decreased amid the prospects of higher inflation and slower economic growth. Russia and Ukraine are key exporters of many commodities, including oil, which would increase the production costs and bring us closer to stagflation. What’s next, risk aversion increased significantly, which is supportive of safe-haven assets such as gold. After all, Putin’s decision to invade Ukraine is a turning point in modern history, which ends a period of civilized relations with Russia and relative safety in the world. Although Russia’s army discredited itself in Ukraine, the country still has nuclear weapons able to destroy the globe. As you can see in the chart below, both the credit spreads (represented here by the ICE BofA US High Yield Index Option-Adjusted Spread) and the CBOE volatility index (also called “the fear index”) rose considerably in the last two weeks. Hence, the long-term outlook for gold is more bullish than before the invasion. The short-term future is more uncertain, as there might be periods of consolidation and even corrections if the conflict de-escalates or ends. However, given the lack of any decisions during today’s talks between Ukrainian and Russian foreign ministers and the continuation of the military actions, gold may rally further. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
S&P 500 – Should We Buy the Dip? - 10.03.2022

S&P 500 – Should We Buy the Dip? - 10.03.2022

Arkadiusz Sieron Arkadiusz Sieron 10.03.2022 15:40
  Stock prices remain very volatile, as the Ukraine conflict keeps dominating headlines. Will the market reverse its downtrend? The S&P 500 index gained 2.57% on Wednesday, Mar. 9, as it retraced some of the recent decline. The broad stock market’s gauge got back to the 4,300 level after bouncing from its Tuesday’s low of 4,157.87. On Feb. 24 the index fell to the local low of 4,114.65 and it was 704 points or 14.6% below the January 4 record high of 4,818.62. There’s still a lot of uncertainty concerning the ongoing Ukraine conflict. This morning the S&P 500 index is expected to open 1.3% lower and we may see further consolidation. The nearest important resistance level is now at 4,300, and the next resistance level is at 4,350-4,400, among others. On the other hand, the support level remains at 4,150-4,200. The S&P 500 index continues to trade above the recently broken downward trend line, as we can see on the daily chart (chart by courtesy of http://stockcharts.com): Futures Contract – More Consolidation Let’s take a look at the hourly chart of the S&P 500 futures contract. Recently it broke below the short-term consolidation. On Tuesday it fell to around 4,150, before bouncing back to the 4,200-4,250 level. We are still maintaining our long position, as we are expecting an upward correction from the current levels (chart by courtesy of http://tradingview.com): Conclusion The S&P 500 index bounced yesterday, but this morning it is expected to open lower. We will likely see some more news-driven volatility. For now, it looks like an upward correction but it may also be a more meaningful upward reversal. Here’s the breakdown: The S&P 500 index retraced some of the recent decline, but we may see more volatility. We are maintaining our long position. We are expecting an upward correction from the current levels. Like what you’ve read? Subscribe for our daily newsletter today, and you'll get 7 days of FREE access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today! Thank you. Paul Rejczak,Stock Trading StrategistSunshine Profits: Effective Investments through Diligence and Care * * * * * The information above represents analyses and opinions of Paul Rejczak & Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. At the time of writing, we base our opinions and analyses on facts and data sourced from respective essays and their authors. Although formed on top of careful research and reputably accurate sources, Paul Rejczak and his associates cannot guarantee the reported data's accuracy and thoroughness. The opinions published above neither recommend nor offer any securities transaction. Mr. Rejczak is not a Registered Securities Advisor. By reading his reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Paul Rejczak, Sunshine Profits' employees, affiliates as well as their family members may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
Ukraine’s Defense Shines ‒ and So Does Gold

Ukraine’s Defense Shines ‒ and So Does Gold

Arkadiusz Sieron Arkadiusz Sieron 08.03.2022 17:37
  Russian forces have made minimal progress against Ukraine in recent days. Unlike the invader, gold rallied very quickly and achieved its long-awaited target - $2000! Nobody expected the Russian inquisition! Nobody expected such a fierce Ukrainian defense, either. Of course, the situation is still very dramatic. Russian troops continued their offensive and – although the pace slowed down considerably – they managed to make some progress, especially in southern Ukraine, by bolstering air defense and supplies. The invaders are probably preparing for the decisive assault on Kyiv. Where Russian soldiers can’t break the defense, they bomb civilian infrastructure and attack ordinary people, including targeting evacuation corridors, to spread terror. Several Ukrainian cities are besieged and their inhabitants lack basic necessities. The humanitarian crisis intensifies. However, Russian forces made minimal ground advances over recent days, and it’s highly unlikely that Russia has successfully achieved its planned objectives to date. According to the Pentagon, nearly all of the Russian troops that were amassed on Ukraine’s border are already fighting inside the country. Meanwhile, the international legion was formed and started its fight for Ukraine. Moreover, Western countries have recently supplied Ukraine with many hi-tech military arms and equipment, including helicopters, anti-tank weapons, and anti-aircraft missiles, which could be crucial in boosting the Ukrainian defense.   Implications for Gold What does the war in Ukraine imply for the precious metals? Well, gold is shining almost as brightly as the Ukrainian defense. As the chart below shows, the price of the yellow metal has surged above $1,980 on Monday (March 7, 2022), the highest level since August 2020. What’s more, as the next chart shows, during today’s early trading, gold has soared above $2,020 for a while, reaching almost an all-time high. In my most recent report, I wrote: “as long as the war continues, the yellow metal may shine (…). The continuation or escalation of Russia’s military actions could provide support for gold prices.” This is exactly what we’ve been observing. This is not surprising. The war has increased the safe-haven demand for gold, while investors have become more risk-averse and have continued selling equities. As you can see in the chart below, the S&P 500 Index has plunged more than 12% since its peak in early January. Some of the released funds went to the gold market. What’s more, the credit spreads have widened, while the real interest rates have declined. Both these trends are fundamentally positive for the yellow metal. Another bullish driver of gold prices is inflation. It’s already high, and the war in Ukraine will only add to the upward pressure. The oil price has jumped above $120 per barrel, almost reaching a record peak. Higher energy prices would translate into higher CPI readings in the near future. Other commodities are also surging. For example, the Food Price Index calculated by the Food and Agriculture Organization of the United Nations has soared above 140 in February, which is a new all-time high, as the chart below shows. Higher commodity prices could lead to social unrest, as was the case with the Arab Spring or recent protests in Kazakhstan. Higher energy prices and inflation imply slower real GDP growth and more stagflationary conditions. As a reminder, in 2008 we saw rapidly rising commodities, which probably contributed to the Great Recession. In such an environment, it’s far from clear that the Fed will be very hawkish. It will probably hike the federal funds rate in March, as expected, but it may soften its stance later amid the conflict between Ukraine and the West with Russia and elevated geopolitical risks. The more dovish Fed should also be supportive of gold prices. However, when the fighting cools off, the fear will subside, and we could see a correction in the gold market. Both sides are exhausted by the conflict and don’t want to continue it forever. The Russian side has already softened its stance a bit during the most recent round of negotiations, as it probably realized that a military breakthrough was unlikely. Hence, when the conflict ends, gold’s current tailwind could turn into a headwind. Having said that, the impact of the conflict may not be as short-lived this time. I'm referring to the relatively harsh sanctions and high energy prices that may last for some time after the war is over. . The same applies to a more hawkish stance toward Russia and European governments’ actions to become less dependent on Russian gas and oil. A lot depends on how the conflict will be resolved, and whether it brings us Cold War 2.0. However, two things are certain: the world has already changed geopolitically, and at the beginning of this new era, the fundamental outlook for gold has turned more bullish than before the war. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Fighting Continues: Good for Ukraine... And Gold

Fighting Continues: Good for Ukraine... And Gold

Arkadiusz Sieron Arkadiusz Sieron 03.03.2022 16:10
  Kherson fell, but Ukrainians are still fighting fiercely. In the face of war, gold also shows courage – to move steadily up. The battle of Ukraine is still going on. Russian troops took control of Kherson, a city of about 300,000 in the south of Ukraine, but other main cities haven’t been captured yet. Ukrainian soldiers even managed to conduct some counter-offensive actions near the country’s capital. There is a large Russian column advancing on Kyiv, but its progress has been very slow over the last few days due to the staunch Ukrainian resistance and Russian forces’ problems with equipment, tactics, and supplies, including fuel and food. David is still bravely fighting Goliath! Of course, Russian forces still have an advantage and are progressing. However, the pace of the invasion is much slower than Vladimir Putin and his generals expected. The Ukrainians’ defense is much fiercer, while Russia’s losses are more severe. The Russian defense ministry admitted that 498 Russian soldiers have already been killed and 1,597 wounded, but the real number is probably much higher. Even if Russia takes control of other cities, it’s unclear whether it will be able to hold them. What’s more, although the West didn’t engage directly in the war, the response of the West was much stronger than Putin could probably have expected. The US and its allies supplied Ukraine with weapons and imposed severe sanctions against Putin and the Russian governing elite, as well as on Russia’s economy and financial system. For instance, the West decided to exclude several Russian banks from SWIFT and also to freeze most of Russian central bank’s foreign currency reserve assets. Additionally, many international companies are moving out of Russia or exporting their products to this country, adding to the economic pressure. The ruble plummeted, as the chart below shows.   Implications for Gold What does the ongoing war in Ukraine mean for the precious metals market? Well, the continuous heroic stance of President Volodymyr Zelenskyy and Ukrainian defenders is not only heating up the hearts of all freedom-lovers, but also gold prices. As the chart below shows, the price of the yellow metal has soared to about $1,930, the highest level since January 2021. As a reminder, until recently, gold was unable to surpass $1,800. Thus, the recent rally is noteworthy. The war is clearly boosting the safe-haven demand for gold. Another bullish driver is rising inflation. According to early estimates, euro area annual inflation soared from 5.1% in January to 5.8%, and the war is likely to add to the inflationary pressure due to rising energy prices. Both Brent and WTI oil prices have surged above $110 per barrel. Last but not least, I have to mention Powell’s appearance before Congress. In the prepared testimony, he said that the Fed would hike the federal funds rate this month, despite the war in Ukraine: Our monetary policy has been adapting to the evolving economic environment, and it will continue to do so. We have phased out our net asset purchases. With inflation well above 2 percent and a strong labor market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month. This sounds rather hawkish and, thus, bearish for gold. However, Powell acknowledged that the implications of Russia’s invasion of Ukraine for the U.S. economy are highly uncertain. The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain. Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook. Hence, the war in Eastern Europe could make the Fed more dovish than expected at a time when inflation could be higher than forecasted before the war outbreak. Such an environment should be bullish for the gold market. However, there is one important caveat. The detailed analysis of gold prices shows that they declined around the first and second rounds of negotiations between Russian and Ukrainian diplomats in anticipation of the end of the conflict. However, when it became apparent that the talks ended in a stalemate, gold resumed its upward move. The implication should be clear: as long as the war continues, the yellow metal may shine, but when the ceasefire or truce is agreed, we could see a correction in the gold market. It doesn’t have to be a great plunge, but a large part of the geopolitical premium will disappear. Having said that, the war may take a while. I pray that I’m wrong, but the slow progress of the Russian invasion could prompt Vladimir Putin to adopt a “whatever it takes” stance. According to some experts, he is already more emotional than usual, and when faced with the prospects of failure, he could become even more brutal or irrational. We already see that Russian troops, unable to break the Ukrainian defense in open combat, siege the cities and bomb civilians. Hence, the continuation or escalation of Russia’s military actions could provide support for gold prices. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Price Of Gold (XAUUSD) Will Be Supported, But Probable Massive Sale Of Russian Gold Can Hinder The Rise

Price Of Gold (XAUUSD) Will Be Supported, But Probable Massive Sale Of Russian Gold Can Hinder The Rise

Arkadiusz Sieron Arkadiusz Sieron 01.03.2022 16:01
  Russia underestimated Ukraine’s fierce defense. Instead of quick conquest, the war is still going on. The same applies to pulling the rope between gold bulls and bears. It was supposed to be a blitzkrieg. The plan was simple: within 72 hours Russian troops were to take control of Kyiv, stage a coup, overthrow the democratically elected Ukrainian authorities, and install a pro-Russian puppet government. Well, the blitzkrieg clearly failed. The war has been going on for five days already, and Kyiv (and other major cities) remains in Ukrainian hands, while the Russians suffer great losses. Indeed, the Ukrainians are fighting valiantly. The Kremlin apparently did not expect such high morale among the troops and civilians, as well as such excellent organization and preparation. Meanwhile, the morale among Russian soldiers is reported to be pathetically low, as they have no motivation to fight with culturally close Ukrainians (many of whom speak perfect Russian). The invaders are also poorly equipped, and the whole operation was logistically unprepared (as the assumption was a quick capitulation by Ukrainian forces and a speedy collapse of the government in Kyiv). Well, pride comes before a fall. What’s more, the West is united as never before (Germany did a historic U-turn in its foreign and energy policies) and has already imposed relatively heavy economic sanctions on Russia (including cutting off some of the country’s banks from SWIFT), and donated weapons to Ukraine. However – and unfortunately – the war is far from being ended. Military analysts expect a second wave of Russian troops that can break the resistance of the Ukrainians, who have fewer forces and cannot relieve the soldiers just like the other side. Indeed, satellite pictures show a large convoy of Russian forces near Kyiv. Russia is also gathering troops in Belarus and – sadly – started shelling residential quarters in Ukrainian cities. According to US intelligence, Belarusian soldiers could join Russian forces. The coming days will be crucial for the fate of the conflict.   Implications for Gold What does the war between Russia and Ukraine imply for the gold market? Well, initially, the conflict was supportive of gold prices. As the chart below shows, the price of gold (London Fix) soared to $1,936 on Thursday. However, the rally was very short-lived, as the very next day, gold prices fell to $1,885. Thus, gold’s performance looked like “buy the rumor, sell the news.” However, yesterday, the price of the yellow metal returned above $1,900, so some geopolitical risk premium may still be present in the gold market. Anyway, it seems that I was right in urging investors to focus on fundamentals and to not make long-term investments merely based on geopolitical risks, the impact of which is often only temporary. Having said that, gold may continue its bullish trend, at least for a while. After all, the war not only increases risk aversion, but it also improves gold’s fundamental outlook. First of all, the Fed is now less likely to raise the federal funds rate in March. It will probably still tighten its monetary policy, but in a less aggressive way. For example, the market odds of a 50-basis point hike decreased from 41.4% one week ago to 12.4% now. What’s more, we are observing increasing energy prices, which could increase inflation further. The combination of higher inflation and a less hawkish Fed should be fundamentally positive for gold prices, as it implies low real interest rates. On the other hand, gold may find itself under downward pressure from selling reserves to raise liquidity. I'm referring to the fact that the West has cut Russia off from the SWIFT system in part. In such a situation, Russia would have to sell part of its massive gold reserves, which could exert downward pressure on prices. Hence, the upcoming days may be quite volatile for the gold market. At the end of my article, I would like to point out that although the war in Ukraine entails implications for the precious metals market, it is mostly a humanitarian tragedy. My thoughts and prayers are with all the casualties of the conflict and their families. I hope that Ukraine will withstand the invasion and peace will return soon! 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, PhDSunshine Profits: Effective Investment through Diligence & Care
It's Not Surprising That Gold (XAU) Is Topping The Headlines Again

It's Not Surprising That Gold (XAU) Is Topping The Headlines Again

Arkadiusz Sieron Arkadiusz Sieron 25.02.2022 14:49
  As the COVID-19 pandemic has shown, it is worth being better prepared for a possible crisis. Does that mean it pays to have some gold up your sleeve? I have to confess something. I always laughed at preppers (aka survivalists) – people who spend their entire lives stockpiling beans and ammo in preparation for the highly unlikely doomsday scenarios. C’mon, who would take these freaks seriously? Well, as the pandemic and supply crisis showed us, we all should. When most people scrambled for masks and hand sanitizers, preppers laughed. When most people fought epic battles for toilet paper and something to eat to survive the Great Lockdown, preppers laughed. When most people were confronted with surging inflation and supply shortages of different products, preppers laughed. When most people panicked upon hearing about energy blackouts, preppers laughed. It seems that mocked preppers got the last laugh, after all. Hence, the COVID-19 epidemic made it clear that the world is not a paradise flowing with milk and honey and that bad things do really happen, so we should be more prepared for possible calamities, even if they look like remote possibilities. For example, experts now point out the threat of cyberattacks, and just last month, Kazakhstan’s government turned off the internet nationwide, depriving its citizens of access to their bank accounts. The problem is, of course, that crises always seem highly unlikely until they occur. Meanwhile, historical cases are too distant and abstract for us, and we tend to think that “this time is different”, or that “we’ll make it through somehow.” Perhaps you will, but it’s much easier when you are prepared. When other people panic, you don’t, because you have made your preparation and have a clear plan of action. You see, the issue is not if the crisis hits, but when. It’s just a matter of time, even the government suggests storing at least a several-day supply of non-perishable food. However, the problem is that when things are going well, people don’t think about preparing. Why should we worry and spoil the fun? Let’s drink like tomorrow never comes! Maybe the problem will somehow disappear by itself, and if it doesn’t, we’ll deal with it later. I got it, but how does it all relate to gold? Well, quite simply. Owning gold is a part of preparing for the worst. This is because gold is the store of value that appreciates when confidence in fiat money declines. It’s also a safe-haven asset, which shines during financial crises when asset prices generally decline. The best example may be the Great Recession or 2020 economic crisis when gold performed much better than the S&P 500 Index, as the chart below shows. You can also think of gold as a portfolio insurance policy or a hedge against tail risks. A house fire is not very likely, but it’s generally smart to have insurance, you know, just in case. Similarly, the collapse of the financial markets and the great plunge of asset prices are not of great probability (although the Great Depression, late 2008, and early 2020 show that they are clearly possible), but it’s nice to have a portfolio diversifier that is not afraid of black swans. In a sense, the whole issue boils down to individual responsibility. Do you take responsibility for your life and for being prepared for different scenarios, or do you count on other people, the government, or simply luck, magically thinking that everything always goes well? To be clear, being prepared doesn’t equal being pessimistic – it’s rather about being realistic and hoping for the best, but planning for the worst. However, there are two important caveats to consider before exchanging all of your paper currency for gold coins. First, you shouldn’t conflate holding gold as insurance with gold as an investment asset. When you want protection, you’re not interested in price trends. There might be a bear market, but gold would still fulfill its hedging role. This is also why you shouldn’t own more than about 5-10% of your whole portfolio in precious metals (as insurance, you can invest more in gold as an investment or as a part of your trading strategy). Second, don’t treat gold as a panacea for all possible disasters. It all depends on what you are preparing for. If you expect power outages, buy batteries, power banks, and think about alternate sources of energy. Precious metals won’t power your home. If you fear a zombie apocalypse (who doesn’t?), flamethrowers and rifles seem to be better weapons than gold bars (although large ones can serve quite well). If you can’t wait for a nuclear explosion (who can?), you will need a proper shelter with uncontaminated food rather than shiny metal (pun intended). It’s possible that in such a post-apocalyptic world, people would initially return to a commodity-based standard rather than the gold standard. It all depends on the particular conditions and how deeply the civilization would devolve. Hence, don’t be scared by dodgy people and false advertising into buying gold because of imminent hyperinflation, the total collapse of the financial system, nuclear greetings from Kim Jong-Un, or another calamity. The role of gold is not to rescue you from all kinds of troubles, but to be insurance that pays off during economic crises. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
Price Of Gold Chart (XAUUSD) Reaches Levels Of January 2021

Price Of Gold Chart (XAUUSD) Reaches Levels Of January 2021

Arkadiusz Sieron Arkadiusz Sieron 24.02.2022 11:41
  The war has begun: after a few weeks of tense situation, Russia has taken a radical step and started an invasion of Ukraine. How will this affect gold? Boy, ! The Russia-Ukraine conflict is intensifying swiftly. On Tuesday, Russian President Vladimir Putin announced the recognition of two self-proclaimed republics in eastern Ukraine (Donetsk and Luhansk regions). The decree also included an order to send Russian troops there as “peacekeeping forces”. In response, Ukraine declared a state of emergency, while the EU banned purchases of Russian government bonds and imposed sanctions on most members of the Russian parliament. Germany froze approvals for the Nord Stream 2 gas pipeline. American President Joe Biden also released the first tranche of sanctions against Russia, targeted mainly at banks and sovereign debt, and promised further moves: Today, I am announcing the first tranche of sanctions to impose a cost on Russia in response to their actions yesterday. We’ll continue to escalate sanctions if Russia escalates. We are implementing full blocking sanctions on two large Russian financial institutions VEB and military bank. We are implementing comprehensive sanctions on Russia’s sovereign debt. That means we’ve cut off Russia’s government from Western financing. Starting tomorrow, we’ll also impose sanctions on Russia’s elites and family members. Putin wasn’t apparently impressed by these sanctions, as he authorized a military operation in eastern Ukraine early Thursday. The invasion has started. Indeed, there are reports of Russian troops crossing the Ukrainian border in multiple locations, and of explosions in many of the country’s cities, including the capital, Kyiv. Ukrainian Foreign Minister Dmytro Kuleba tweeted that: Putin has just launched a full-scale invasion of Ukraine. Peaceful Ukrainian cities are under strikes. This is a war of aggression. Ukraine will defend itself and will win. The world can and must stop Putin. The time to act is now.   Implications for Gold What does Russia’s invasion of Ukraine imply for the gold market? Well, risk aversion has soared amid the conflict. Equities are plunging while safe-haven assets are soaring. This, of course, applies also to gold, which rallied to $1,905 on Wednesday, the highest level since January 2021, as the chart below shows. In response to the invasion, the price of the yellow metal continued its upward trend, soaring to $1,945 on early Thursday, as one can see in the chart below. The move was perfectly in line with what I wrote on Tuesday: “if Russia invades Ukraine, the yellow metal should gain further.” Now, the question is: what next? I’m not a military expert, so I have no idea how the conflict will end. However, I know three things. The first is that the conflict will last some time. During the escalation period, gold prices will be driven up by risk aversion and safe-haven demand. Second, the conflict will start to de-escalate and end at some point. Then, we could see a correction in the gold market. Having said that, the yellow metal doesn’t have to immediately return to the pre-conflict level, as it could be supported by other factors, such as worries about inflation, and generally a rather bullish momentum. My point is that geopolitical events usually exert only a short-lived impact on gold, as they don’t affect the true fundamentals of the gold market. These will be shaped by the inflation path and the Fed’s reaction to it. Third, the upcoming weeks could be hot for the gold market. Don’t let emotions affect your investments. Remember the initial stage of the coronavirus pandemic? We all felt fear then – but it wasn’t the best investment advisor. War is also terrifying, but so far the conflict is limited to Ukraine and Russia and we don’t know yet whether the invasion will really escalate into a full-blown, bloody war. Be calm and stay tuned! 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Is It Like XAUUSD Is Supported By Everything? How Long Will The Strengthening Last?

Is It Like XAUUSD Is Supported By Everything? How Long Will The Strengthening Last?

Arkadiusz Sieron Arkadiusz Sieron 22.02.2022 16:01
  The current military tensions and the Fed’s sluggishness favor gold bulls, but not all events are positive for the yellow metal. What should we be aware of? It may be quiet on the Western Front, but quite the opposite on the Eastern Front. Russia has accumulated well over 100,000 soldiers on the border with Ukraine and makes provocations practically every day, striving for war more and more clearly. Last week, shelling was reported on Ukraine’s front line and Russia carried out several false flag operations. According to Linda Thomas-Greenfield, the U.S. Ambassador to the United Nations, “the evidence on the ground is that Russia is moving toward an imminent invasion.” Meanwhile, President Biden said: “We have reason to believe they are engaged in a false flag operation to have an excuse to go in. Every indication we have is they're prepared to go into Ukraine and attack Ukraine.” Of course, what politicians say should always be taken with a pinch of salt, but it seems that the situation has gotten serious and the risk of Russian invasion has increased over recent days.   Implications for Gold What does the intensifying conflict between Russia and Ukraine imply for the gold market? Well, the last week was definitely bullish for the yellow metal. As the chart below shows, the price of gold (London P.M. Fix) rallied over the past few days from $1,849 to $,1894, the highest level since June 2021; And he gold futures have even jumped above $1,900 for a while! Part of that upward move was certainly driven by geopolitical risks related to the assumed conflict between Russia and Ukraine. This is because gold is a safe-haven asset in which investors tend to park their money in times of distress. It’s worth remembering that not all geopolitical events are positive for gold, and when they are, their impact is often short-lived. Hence, if Russia invades Ukraine, the yellow metal should gain further, but if uncertainty eases, gold prices may correct somewhat. To be clear, the timing of the current military tensions is favorable for gold bulls. First of all, we live in an environment of already high inflation. Wars tend to intensify price pressure as governments print more fiat money to finance the war effort and reorient their economies from producing consumer goods toward military stuff. Not to mention the possible impact of the conflict on oil prices, which would contribute to rising energy costs and CPI inflation. According to Morgan Stanley’s analysts, further increases in energy prices could sink several economies into an outright recession. Second, the pace of economic growth is slowing down. The Fed has been waiting so long to tighten its monetary policy that it will start hiking interest rates in a weakening economic environment, adding to the problems. There is a growing risk aversion right now, with equities and cryptocurrencies being sold off. Such an environment is supportive of gold prices. Third, the current US administration has become more engaged around the world than the previous one. My point is that the current conflict is not merely between Russia and Ukraine, but also between Russia and the United States. This is one of the reasons why gold has been reacting recently to the geopolitical news. However, a Russian invasion of Ukraine wouldn’t pose a threat to America, and the US won’t directly engage in military operations on Ukrainian land, so the rally in gold could still be short-lived. If history is any guide, geopolitical events usually trigger only temporary reactions in the precious metals markets, especially if they don’t threaten the United States and its economy directly. This is because all tensions eventually ease, and after a storm comes calm. Hence, although the media would focus on the conflict, don’t get scared and – when investing in the long run – remember gold fundamentals. Some of them are favorable, but we shouldn’t forget about the Fed’s tightening cycle and the possibility that disinflation will start soon, which could raise the real interest rates, creating downward pressure on gold prices. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Wondering How Inflation And Fed Reaction Will Affect Gold

Wondering How Inflation And Fed Reaction Will Affect Gold

Arkadiusz Sieron Arkadiusz Sieron 18.02.2022 16:05
  Not only won’t inflation end soon, it’s likely to remain high. Whether gold will be able to take advantage of it will depend, among others, on the Fed. Do you sometimes ask yourself when this will all end? I don’t mean the universe, nor our lives, nor even this year (c’mon, guys, it has just started!). I mean, of course, inflation. If only you weren’t in a coma last year, you would have probably noticed that prices had been surging recently. For instance, America finished the year with a shocking CPI annual rate of 7.1%, the highest since June 1982, as the chart below shows. Now, the key question is how much higher inflation could rise, or how persistent it could be. The consensus is that we will see a peak this year and subsequent cooling down, but to still elevated levels. This is the view I also hold. However, would I bet my collection of precious metals on it? I don’t know, as inflation could surprise us again, just as it did to most of the economists (but not me) last year. The risk is clearly to the upside. As always in economics, it’s a matter of supply and demand. There is even a joke that all you need to turn a parrot into an economist is to teach it to say ‘supply’ and ‘demand’. Funny, huh? When it comes to the demand side, both the money supply growth and the evolution of personal saving rate implies some cooling down of inflation rate. Please take a look at the chart below. As you can see, the broad money supply peaked in February 2021. Assuming a one-year lag between the money supply and price level, inflation rate should reach its peak somewhere in the first quarter of this year. There is one important caveat here: the pace of money supply growth has not returned to the pre-pandemic level, but it stabilized at about 13%, double the rate seen at the end of 2019. Inflation was then more or less at the Fed’s target of 2%, so without constraining money supply growth, the US central bank couldn’t beat inflation. As the chart above also shows, the personal saving rate has returned to the pre-pandemic level of 7-8%. It means that the bulk of pent-up demand has already materialized, which should also help to ease inflation in the future. However, not all of the ‘forced savings’ have already entered the market. Thus, personal consumption expenditures are likely to be elevated for some time, contributing to boosted inflation. Regarding supply factors, although some bottlenecks have eased, the disruptions have not been fully resolved. The spread of the Omicron variant of the coronavirus and regional lockdowns in China could prolong the imbalances between booming demand and constrained supply. Other contributors to high inflation are rising producer prices, increasing house prices and rents, strong inflation expectations (see the chart below), and labor shortages combined with fast wage growth. The bottom line is that, all things considered – in particular high level of demand, continued supply issues, and de-anchored inflation expectations – I forecast another year of elevated inflation, but probably not as high as in 2021. After reaching a peak in a few months, the inflation rate could ease to, let’s say, around 4% in December, if we are lucky. Importantly, the moderate bond yields also suggest that inflation will ease somewhat later in 2022. What does it mean for the gold market? Well, I don’t have good news for the gold bulls. Gold loves high and accelerating inflation the most. Indeed, as the chart below shows, gold peaks coincided historically with inflation heights. The most famous example is the inflation peak in early 1980, when gold ended its impressive rally and entered into a long bearish trend. The 2011 top also happened around the local inflationary peak. The only exception was the 2005 peak in inflation, when gold didn’t care and continued its bullish trend. However, this was partially possible thanks to the decline in the US dollar, which seems unlikely to repeat in the current macroeconomic environment, in which the Fed is clearly more hawkish than the ECB or other major central banks. The relatively strong greenback won’t help gold shine. Surely, disinflation may turn out to be transitory and inflation may increase again several months later. Lower inflation implies a less aggressive Fed, which should be supportive of gold prices. However, investors should remember that the US central bank will normalize its monetary policy no matter the inflation rate. Since the Great Recession, inflation has been moderate, but the Fed has tightened its stance eventually, nevertheless. Hence, gold may experience a harsh moment when inflation peaks. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
Is It Worth Adding Gold to Your Portfolio in 2022?

Is It Worth Adding Gold to Your Portfolio in 2022?

Arkadiusz Sieron Arkadiusz Sieron 17.02.2022 16:29
  Gold prices declined in 2021 and the prospects for 2022 are not impressive as well. However, the yellow metal’s strategic relevance remains high. Last month, the World Gold Council published two interesting reports about gold. The first one is the latest edition of Gold Demand Trends, which summarizes the entire last year. Gold supply decreased 1%, while gold demand rose 10% in 2021. Despite these trends, the price of gold declined by around 4%, which – for me – undermines the validity of the data presented by the WGC. I mean here that the relevance of some categories of gold demand (jewelry demand, technological demand, the central bank’s purchases) for the price formation is somewhat limited. The most important driver for gold prices is investment demand. Unsurprisingly, this category plunged 43% in 2021, driven by large ETF outlfows. According to the report, “gold drew direction chiefly from inflation and interest rate expectations in 2021,” although it seems that rising rates outweighed inflationary concerns. As the chart below shows, the interest rates increased significantly last year. For example, 10-year Treasury yields rose 60 basis points. As a result, the opportunity costs for holding gold moved up, triggering an outflow of gold holdings from the ETF. As the rise in interest rates is likely to continue in 2022 because of the hawkish stance of the Fed, gold investment may struggle this year as well. The end of quantitative easing and the start of quantitative tightening may add to the downward pressure on gold prices. However, there are some bullish caveats here. First, gold has remained resilient in January, despite the hawkish FOMC meeting. Second, the Fed’s tightening cycle could be detrimental to the US stock market and the overall, highly indebted economy, which could be supportive of gold prices. Third, as the report points out, “gold has historically outperformed in the months following the onset of a US Fed tightening cycle”. The second publication released by the WGC last month was “The Relevance of Gold as a Strategic Asset 2022”. The main thesis of the report is that gold is a strategic asset, complementary to equities and bonds, that enhances investment portfolios’ performance. This is because gold is “a store of wealth and a hedge against systemic risk, currency depreciation, and inflation.” It is also “highly liquid, no one’s liability, carries no credit risk, and is scarce, historically preserving its value over time.” Gold is believed to be a great source of return, as its price has increased by an average of nearly 11% per year since 1971, according to the WGC. Gold can also provide liquidity, as the gold market is highly liquid. As the report points out, “physical gold holdings by investors and central banks are worth approximately $4.9 trillion, with an additional $1.2 trillion in open interest through derivatives traded on exchanges or the over-the-counter (OTC) market.” Last but not least, gold is an excellent portfolio diversifier, as it is negatively correlated with risk assets, and – importantly – this negative correlation increases as these assets sell off. Hence, adding gold to a portfolio could diversify it, improving its risk-adjusted return, and also provide liquidity to meet liabilities in times of market stress. The WGC’s analysis suggests that investors should consider adding between 4% and 15% of gold to the portfolio, but personally, I would cap this share at 10%.   Implications for Gold What do the recent WGC reports imply for the gold market? Well, one thing is that adding some gold to the investment portfolio would probably be a smart move. After all, gold serves the role of both a safe-haven asset and an insurance against tail risks. It’s nice to be insured. However, investing in gold is something different, as gold may be either in a bullish or bearish trend. You should never confuse these two motives behind owning gold! Sometimes it’s good to own gold for both insurance and investment reasons, but not always. When it comes to 2022, investment demand for gold may continue to be under downward pressure amid rising interest rates. However, there are also some bullish forces at work, which could intensify later this year. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Fat or Flat: Gold Price in 2022

Fat or Flat: Gold Price in 2022

Arkadiusz Sieron Arkadiusz Sieron 15.02.2022 17:10
  Analysts' 2022 forecasts for the gold market are not overwhelmingly enthusiastic – they see it flat. However, maybe the opposite should be expected. The LBMA has recently published its annual precious metals forecast survey. In general, the report is neutral about gold in 2022. On average, the analysts forecast gold prices to be broadly flat this year compared to the year. The average gold price in 2021 was $1,799, and it is expected to rise merely $3 to $1,802. How boring! However, as the table below shows, the forecasts for other precious metals are much more bearish, especially for palladium. The headline numbers are the averages of 34 analysts’ forecasts. The greatest bears see the average price of gold as low as $1.630, while the lowest low – at $1,500. Meanwhile, the biggest bulls expect the average price of gold to be $1,965, while the highest high is expected to be $2.280. The three most important drivers of precious metals prices’ performance this year are the Fed’s monetary policy, inflation, and equity market performance. This is a huge change compared to last year, when analysts considered geopolitical factors, the impact of the COVID-19 pandemic, and the pace of economic recovery to be much more important. I agree this time, of course, as I always believed that macroeconomic factors are more relevant to the long-term trend in the gold market than geopolitical drivers. Generally, the pick-up in inflation, which will keep real interest rates in negative territory, is seen as a tailwind for gold. Some analysts also expect the greenback to depreciate as the global economic recovery gathers steam, which would also be supportive of gold prices. Meanwhile, normalization of monetary policy is considered the greatest headwind for the yellow metal, as the Fed’s tightening cycle will raise the opportunity cost of holding gold. However, the markets have probably already priced the interest rate hikes in, so gold doesn’t have to suffer during the tightening cycle. Last time, the price of gold began to rise after the liftoff of the federal funds rate. The analysts surveyed by the LBMA also doubt the central banks’ ability to raise interest rates as high as needed to crush inflation. Instead, they are expected to stay behind the inflation curve. This is because the forecasted tightening cycle could be too difficult for the asset market and indebted economy to stomach, so it will be moderate and short-lived, just like last time.   Implications for Gold What does the LBMA annual forecast survey predicts for the yellow metal? The report is neutral, probably because gold remains under the influence of opposite forces, which makes forecasting really challenging this year. Gold has been recently in a sideways trend, so it’s somewhat natural to expect simply more of the same, i.e., the flat market. Actually, the pundits always forecast more of the same. For example, the previous edition of the survey was bullish, as 2020 was a great year for gold. Thus, the analysts’ 2021 average forecast for the price of gold was $1,973.8, almost $200 above the actual level. Hence, please take the survey with a pinch of salt. OK, the analysts don’t predict a literally flat market. The forecasts concerned averages, but some experts see the first half of the year as more bullish than the second, while others, vice versa. I’d rather include myself in the latter group, as my view is that the expectations of Fed tightening will continue to exert downward pressure on gold prices in the coming weeks. However, the hawkish expectations have probably gone a little too far. At some point this year, they will be adjusted, as it becomes clear that the Fed will be forced to reduce the pace of its tightening or even reverse its stance in order to calm the market and avoid the next economic crisis. Such an adjustment will be positive for gold prices, especially since it might occur amid still high inflation, but gold bulls should remember that there is still a long way to go before that happens. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
The Question Is How Will Price Of Gold Act In Times Of ECB Meeting

The Question Is How Will Price Of Gold Act In Times Of ECB Meeting

Arkadiusz Sieron Arkadiusz Sieron 10.02.2022 16:22
  Lagarde opened the door to an interest rate hike, which gave the European Central Bank a hawkish demeanor. Does it also imply more bullish gold? The ECB has awoken from its ultra-dovish lethargy. In December 2021, the central bank of the Eurozone announced that its Pandemic Emergency Purchase Program would end in March 2022. Although this won’t also mean the end of quantitative easing as the ECB continues to buy assets under the APP program, the central bank will be scaling down the pace of purchases this year. Christine Lagarde, the ECB’s President, admitted it during her press conference held last week. She said: “We will stop the Pandemic Emergency Programme net asset purchases in March and then we will look at the net asset purchases under the APP.” She also left the door open for the interest rates to be raised. Of course, Lagarde did not directly signal the rate hikes. Instead, she pointed out the upside risk of inflation and acknowledged that the macroeconomic conditions have changed: We are going to use all instruments, all optionalities in order to respond to the situation – but the situation has indeed changed. You will have noticed that in the monetary policy statement that I just read, we do refer to the upside risk to inflation in our projection. So the situation having changed, we need to continue to monitor it very carefully. We need to assess the situation on the basis of the data, and then we will have to take a judgement. What’s more, Lagarde didn’t repeat her December phrase that raising interest rates in 2022 is “very unlikely”. When asked about that, she replied: as I said, I don’t make pledges without conditionalities and I did make those statements at our last press conference on the basis of the assessment, on the basis of the data that we had. It was, as all pledges of that nature, conditional. So what I am saying here now is that come March, when we have additional data, when we’ve been able to integrate in our analytical work the numbers that we have received in the last few days, we will be in a position to make a thorough assessment again on the basis of data. I cannot prejudge what that will be, but we are only a few weeks away from the closing time at which we provide the analytical work, prepare the projections for the Governing Council, and then come with some recommendations and make our decisions. It sounds very innocent, but it’s worth remembering that Lagarde is probably the most dovish central banker in the world (let’s exclude Turkish central bankers who cut interest rates amid high inflation, but they are under political pressure from Erdogan). After all, global monetary policy is tightening. For example, last week, the Bank of England hiked its main policy rate by 25 basis points and started quantitative tightening. Even the Fed will probably end quantitative easing and start raising the federal funds rate in March. In such a company, the ECB seems to be a reckless laggard. Hence, even very shy comments mean something in the case of this central bank. The markets were so impressed that they started to price in 50 basis points of rate hikes this year, probably in an exaggerated reaction.   Implications for Gold What does the latest ECB monetary policy meeting mean for the gold market? Well, maybe it wasn’t an outright revolution, but the ECB is slowly reducing its massive monetary stimulus. Although the euro area does not face the inflationary pressure of the same kind as the US, with inflation that soared to 5% in December and to 5.1% in January (according to the initial estimate), the ECB simply has no choice. As the chart below shows, inflation in the Eurozone is the highest in the whole history of euro. Additionally, in the last quarter of 2021, the GDP of the euro area finally reached its pre-pandemic level, two quarters later than in the case of the US. Europe is back in the game. The economic recovery strengthens the hawkish camp within the ECB. All of this is fundamentally bullish for gold prices. To be clear, don’t expect that Christine Lagarde will turn into Paul Volcker and hike interest rates in a rush. Given the structural problems of the euro area, the ECB will lag behind the Fed and remain relatively more dovish. However, German bond yields have recently risen, and there is still room for further increases. If the market interest rates go up more in Europe than across the pond, which is likely given the financial tightening that has already occurred in the US, the spread between American and German interest rates could narrow further (see the chart below). The narrowing divergence between monetary policies and interest rates in the US and in the Eurozone should strengthen the euro against the greenback – and it should be supportive of gold. As the chart above shows, when the spread was widening in 2012-2018, gold was in the bear market. The yellow metal started its rally at the end of 2018, just around the peak of the spread. On the other hand, if the divergence intensifies, gold will suffer. Given that Powell is expected to hike rates as soon as March, while Lagarde may only start thinking about the tightening cycle, we may have to wait a while for the spread to peak. One thing is certain: it can get hot in March! 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Payrolls Release: Gold Reacted Quickly And Decreased... And Got Back In The Game A Moment Later!

Payrolls Release: Gold Reacted Quickly And Decreased... And Got Back In The Game A Moment Later!

Arkadiusz Sieron Arkadiusz Sieron 08.02.2022 16:42
  The latest employment report strongly supports the Fed’s hawkish narrative. Surprisingly, gold has shown remarkable resilience against it so far. What a surprise! The US labor market added 467,000 jobs last month. As the chart below shows, the number is below December’s figure (+510,000) but much above market expectations – MarketWatch’s analysts forecasted only 150,000 added jobs. Thus, the report reinforces the optimistic view of the US economy’s strength, especially given that the surprisingly good nonfarm payrolls came despite the disruption to consumer-facing businesses from the spread of the Omicron variant of the coronavirus. The unemployment rate increased slightly from 3.9% in December to 4% in January, as the chart above shows. However, it was accompanied by a rise in both the labor force participation rate (from 61.9% to 62.2%) and the employment-population ratio (from 59.5% to 59.7%). Last but not least, average hourly earnings have jumped 5.7% over the last 12 months, as you can see in the next chart. It indicates that wage inflation has intensified recently, despite the surge in COVID-19 cases that was expected by some analysts to dent demand for workers. Hence, the January employment report will cement the hawkish case for the Fed. Rising wages will add to the argument for decisive hiking of interest rates, while the surprisingly strong payrolls will strengthen the Fed’s confidence in the US economy.   Implications for Gold What does the latest employment report imply for the gold market? The unexpectedly high payrolls should be negative for the yellow metal. However, while gold prices initially plunged below $1,800, they rebounded quickly, returning above its key level, as the chart below shows. Gold’s resilience in the face of a strong jobs report is noteworthy and quite encouraging. After all, the report strengthened the US dollar and boosted market expectations of a 50-basis point hike in the federal funds rate in March (from 2.6% one month ago to more than 14% now). Such a big move is unlikely, but the point is that financial conditions are tightening without waiting for the Fed’s actual actions. In the past, gold disliked strong economic reports and rising bond yields and showed a negative correlation with nonfarm payrolls, but not this time. More generally, although long-term fundamentals have turned more bearish in recent months, gold has remained stuck at $1,800. However, last week, two factors could have supported gold prices. The first was rising volatility in the equity market. The S&P 500 Index dropped almost 500 points, or 10%, in January, as the chart below shows. Although it has recovered somewhat, it still remains substantially below the top, with the tech sector experiencing weakness. On Thursday, the shares of Meta, Facebook’s parent company, plunged more than 20%. The second potentially bullish driver was last Thursday’s meeting of the ECB’s Governing Council. The central bank of the Eurozone was more hawkish than expected. Christine Lagarde acknowledged inflationary risks and said that she had become more concerned with the recent surge in inflation. According to initial estimates, the annual inflation rate in the euro area amounted to 5.1% in January 2022, the highest since the common currency was created. Lagarde also backed off her previous guidance that the interest rate hike was “very unlikely” in 2022. The ECB’s pivot – the central bank opening the door for the first rate increase since 2011 – boosted the euro against the greenback. The bottom line is that gold has made itself comfortable around $1,800 and simply doesn’t want – or is not ready – to go away in either direction, at least not yet. The battle between bulls and bears is still on. I’m afraid that, given the relatively aggressive monetary and financial tightening, the sellers will win this clash and gold will drop before the bulls can regain control over the market. However, recent gold’s resilience indicates that there is an underlying bid in the markets and bulls are not giving up. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Price Of Gold Update By GoldViewFX

How the Fed Will Affect Gold? Let's Take A Look Back...

Arkadiusz Sieron Arkadiusz Sieron 04.02.2022 14:47
  Beware, the Fed’s tightening of monetary policy could lift real interest rates! For gold, this poses a risk of prices wildly rolling down. The first FOMC meeting in 2022 is behind us. What can we expect from the US central bank this year and how will it affect the price of gold? Well, this year’s episode of Fed Street will be sponsored by the letter “T”, which stands for “tightening”. It will consist of three elements. First, quantitative easing tapering. The asset purchases are going to end by early March. To be clear, during tapering, the Fed is still buying securities, so it remains accommodative, but less and less. Tapering has been very gradual and well-telegraphed to the markets, so it’s probably already priced in gold. Thus, the infamous taper tantrum shouldn’t replay. Second, quantitative tightening. Soon after the end of asset purchases, the Fed will begin shrinking its mammoth balance sheet. As the chart below shows, it has more than doubled since the start of the pandemic, reaching about $9 trillion, or about 36% of the country’s GDP. It’s so gigantic that even Powell admitted during his January press conference that “the balance sheet is substantially larger than it needs to be.” Captain Obvious attacked again! In contrast to tapering, which just reduces additions to the Fed’s holdings, quantitative tightening will shrink the balance sheet. How much? It’s hard to say. Last time, during QT from 2017 to 2019, the Fed started unloading $10 billion in assets per month, gradually lifting the cap to $50 billion. Given that inflation is now much higher, and the Fed has greater confidence in the economic recovery, the scale of reduction would probably be higher. The QT will create upward pressure on interest rates, which could be negative for the gold market. However, QT will be a very gradual and orderly process. Instead of selling assets directly, the US central bank will stop reinvestment of proceeds as securities run off. As we can read in “Principles for Reducing the Size of the Federal Reserve's Balance Sheet”, The Committee intends to reduce the Federal Reserve's securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account. What’s more, the previous case of QT wasn’t detrimental to gold, as the chart below shows. The price of gold started to rally in late 2018 and especially later in mid-2019. Third, the hiking cycle. In March, the Fed is going to start increasing the federal funds rate. According to the financial markets, the US central bank will enact five interest rate hikes this year, raising the federal funds rate to the range of 1.25-1.50%. Now, there are two narratives about American monetary policy in 2022. According to the first, we are witnessing a hawkish revolution within the Fed, as it would shift its monetary stance in a relatively short time. The central bank will “double tighten” (i.e., it will shrink its balance sheet at the same time as hiking rates), and it will do it in a much more aggressive way than after the Great Recession. Such decisive moves will significantly raise the bond yields, which will hit gold prices. However, in this scenario, the Fed’s aggressive actions will eventually lead to the inversion of the yield curve and later to recession, which should support the precious metals market. On the other hand, some analysts point out that central bankers are all talk and – given their dovish bias – act less aggressively than they promise, chickening out in the face of the first stock market turbulence. They also claim that all the Fed’s actions won’t be enough to combat inflation and that monetary conditions will remain relatively loose. For example, Stephen Roach argues that “the Fed is so far behind [the curve] that it can’t even see the curve.” Indeed, the real federal funds rate is deeply negative (around -7%), as the chart below shows; and even if inflation moderates to 3.5% while the Fed conducts four hikes, it will remain well below zero (about -2%), providing some support for gold prices. Which narrative is correct? Well, there are grains of truth in both of them. However, I would like to remind you that what really matters for the markets is the change or direction, not the level of a variable. Hence, the fact that real interest rates are to stay extremely low doesn’t guarantee that gold prices won’t decline in a response to the hiking cycle. Actually, as the chart above shows, the upward reversal in the real interest rates usually plunges gold prices. Given that real rates are at a record low, a normalization is still ahead of us. Hence, unless inflation continues to rise, bond yields are likely to move up, while gold – to move down. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
XAU Stays Strong, But Went Below The "Iconic" Value

XAU Stays Strong, But Went Below The "Iconic" Value

Arkadiusz Sieron Arkadiusz Sieron 01.02.2022 16:30
  Gold fought valiantly, gold fought nobly, gold fought honorably. Despite all this sacrifice, it lost the battle. How will it handle the next clashes? Have you ever felt trapped in the tyranny of the status quo? Have you ever felt constrained by some invisible yet powerful forces trying to thwart the fullest realization of your potential? I guess this is what gold would feel like right now – if metals could feel anything, of course. Please take a look at the chart below. As you can see, January looked to be quite good for the yellow metal. Its price surpassed the key level of $1,800 at the end of 2021, rallying from $1,793 to $1,847 on January 25, 2022. Then the evil FOMC published its hawkish statement on monetary policy. In its initial response, gold slid. That’s true, but it bravely defended its positions above $1,800 during both Wednesday and Thursday. There was still hope. However, on Friday, the metal capitulated and plunged to $1,788. Here we are again – below the level of $1,800 that gold hasn’t been able to exceed for more than several days since mid-2021, as the chart below shows. Am I disappointed? A bit. Naughty goldie! Am I surprised? Not at all. Although I cheered the recent rally, I was unconvinced about its sustainability in the current macroeconomic context, i.e., economic recovery with tightening of monetary policy (the surprisingly positive report on GDP in the fourth quarter of 2021 didn’t probably help gold), rising interest rates, and possibly a not-distant peak in inflation. In the previous edition of the Fundamental Gold Report, I described the Fed’s actions as “a big hawkish wave that could sink the gold bulls” and pointed out that “gold started its decline before the statement was published, which may indicate more structural weakness.” I added that it was also disturbing that “gold was hit even though the FOMC statement came largely as expected.” Last but not least, I concluded my report with a warning that “the upcoming weeks may be challenging for gold, which would have to deal with rising bond yields.” My warning came true very quickly. Of course, we cannot exclude a relatively swift rebound. After all, gold can be quite volatile in the short-term, and this year could be particularly turbulent for the yellow metal. However, I’m afraid that the balance of risks for gold is the downside. Next month (oh boy, it’s February already!), we will see the end of quantitative easing and the first hike in the federal funds rate, followed soon by the beginning of quantitative tightening and further rate hikes. Using its secret magic, the Fed has convinced the markets that it has become a congregation of hawks, or even a cult of the Great Hawk. According to the CME Fed Tool, future traders have started to price in five 25-basis-point raises this year, while some investors believe that the Fed will lift interest rates by 50 basis points in March. All these clearly hawkish expectations led to the rise in bond yields (see the chart below), creating downward pressure on gold.   Implications for Gold What does the recent plunge in gold prices imply for investors? Well, in a sense, nothing, as short-term price movements shouldn’t affect long-term investments. Trading and investing should be kept separate. However, gold’s return below $1,800 can disappoint even the biggest optimists. The yellow metal failed again. Not the first and not the last time, though. In my view, gold may struggle by March, as all these hawkish expectations will exert downward pressure on the yellow metal. In 2015, the first hike in the tightening cycle coincided with the bottom of the gold market. It may be similar this time, as the actual hike could ease some of the worst expectations and also push markets to think beyond their tightening horizon. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Many Factors to Affect XAU This Year. What About The Past?

Many Factors to Affect XAU This Year. What About The Past?

Arkadiusz Sieron Arkadiusz Sieron 28.01.2022 10:38
  Gold’s fate in 2021 will be determined mainly by inflation and the Fed’s reaction to it. In the epic struggle between chaos and order, chaos has an easier task, as there is usually only one proper method to do a job – the job that you can screw up in many ways. Thus, although economists see a strong economic expansion with cooling prices and normalization in monetary policies in 2022, many things could go wrong. The Omicron strain of coronavirus or its new variants could become more contagious and deadly, pushing the world into the Great Lockdown again. The real estate crisis in China could lead the country into recession, with serious economic consequences for the global economy. Oh, by the way, we could see an escalation between China and Taiwan, or between China and the US, especially after the recent test of hypersonic missiles by the former country. Having said that, I believe that the major forces affecting the gold market in 2022 will be – similarly to last year’s – inflation and the Fed’s response to it. Considering things in isolation, high inflation should be supportive of gold prices. The problem here is that gold prefers high and rising inflation. Although the inflation rate should continue its upward move for a while, it’s likely to peak this year. Indeed, based on very simple monetarist reasoning, I expect the peak to be somewhere in the first quarter of 2022. This is because the lag between the acceleration in money supply growth (March 2020) and CPI growth (March 2021) was a year. The peak in the former occurred in February 2021, as the chart below shows. You can do the math (by the way, this is the exercise that turned out to be too difficult for Jerome Powell and his “smart” colleagues from the Fed). This is – as I’ve said – very uncomplicated thinking that assumes the stability of the lag between monetary impulses and price reactions. However, given the Fed’s passive reaction to inflation and the fact that the pace of money supply growth didn’t return to the pre-pandemic level, but stayed at twice as high, the peak in inflation may occur later. In other words, more persistent inflation is the major risk for the economy that many economists still downplay. The consensus expectation is that inflation returns to a level close to the Fed’s target by the end of the year. For 2021, the forecasts were similar. Instead, inflation has risen to about 7%. Thus, never underestimate the power of the inflation dragon, especially if the beast is left unchecked! As everyone knows, dragons love gold – and this feeling is mutual. The Saxo Bank, in its annual “Outrageous Predictions”, sees the potential for US consumer prices to rise 15% in 2022, as “companies bid up wages in an effort to find willing and qualified workers, triggering a wage-price spiral unlike anything seen since the 1970’s”. Actually, given the fact that millions of Americans left the labor market – which the Fed doesn’t understand and still expects that they will come back – this prediction is not as extreme as one could expect. I still hope that inflationary pressure will moderate this year, but I’m afraid that the fall may not be substantial. On the other hand, we have the Fed with its hawkish rhetoric and tapering of quantitative easing. The US central bank is expected to start a tightening cycle, hiking the federal funds rate at least twice this year. It doesn’t sound good for gold, does it? A hawkish Fed implies a stronger greenback and rising real interest rates, which is negative for the yellow metal. As the chart below shows, the normalization of monetary policy after the Great Recession, with the infamous “taper tantrum”, was very supportive of the US dollar but lethal for gold. However, the price of gold bottomed in December 2015, exactly when the Fed hiked the interest rates for the first time after the global financial crisis. Markets are always future-oriented, so they often react more to expected rather than actual events. Another thing is that the Fed’s tightening cycle of 2015-2018 was dovish and the federal funds rate (and the Fed’s balance sheet) never returned to pre-crisis levels. The same applies to the current situation: despite all the hawkish reactions, the Fed is terribly behind the curve. Last but not least, history teaches us that a tightening Fed spells trouble for markets. As a reminder, the last tightening cycle led to the reversal of the yield curve in 2019 and the repo crisis, which forced the US central bank to cut interest rates, even before anyone has heard of covid-19. Hence, the Fed is in a very difficult situation. It either stays behind the curve, which risks letting inflation get out of control, or tightens its monetary policy in a decisive manner, just like Paul Volcker did in the 1980s, which risks a correction of already-elevated asset prices and the next economic crisis. Such expectations have boosted gold prices since December 2015, and they could support the yellow metal today as well. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
Will FOMC Moves Let Us Prepare Kind of Gold Price Prediction?

Will FOMC Moves Let Us Prepare Kind of Gold Price Prediction?

Arkadiusz Sieron Arkadiusz Sieron 25.01.2022 16:28
  The World Gold Council believes that gold may face similar dynamics in 2022 to those of last year. Well, I’m not so sure about it. Have you ever had the feeling that all of this has already happened and you are in a time loop, repeating Groundhog Day? I have. For instance, I’m pretty sure that I have already written the Fundamental Gold Report with a reference to pop-culture before… Anyway, I’m asking you this, because the World Gold Council warns us against the whole groundhog year for the gold market. In its “Gold Outlook 2022,” the gold industry organization writes that “gold may face similar dynamics in 2022 to those of last year.” The reason is that in 2021, gold was under the influence of two competing forces. These factors were the increasing interest rates and rising inflation, especially strong in operation in the second half of the year, which resulted in the sideways trend in the gold market, as the chart below shows. The WGC sees a similar tug of war in 2022: the hikes in the federal funds rate could create downward pressure for gold, but at the same time, elevated inflation will likely create a tailwind for gold. The WGC acknowledges that the ongoing tightening of monetary policy can be an important headwind for gold. However, it notes two important caveats. First, the Fed has a clear dovish bias and often overpromises when it comes to hawkish actions. For example, in the previous tightening cycle, “the Fed has tended not to tighten monetary policy as aggressively as members of the committee had initially expected.” Second, financial market expectations are more important for gold prices than actual events. As a result, “gold has historically underperformed in the months leading up to a Fed tightening cycle, only to significantly outperform in the months following the first rate hike.” I totally agree. I emphasized many times the Fed’s dovish bias and that the actual interest rate hikes could be actually better for gold than their prospects. After all, gold bottomed out in December 2015, when the Fed raised interest rates for the first time since the Great Recession. I also concur with the WGC that inflation may linger this year. Expectations that inflation will quickly dissipate are clearly too optimistic. As China is trying right now to contain the spread of the Omicron variant of the coronavirus, supply chain disruptions may worsen, contributing to elevated inflation. However, although I expect inflation to remain high, I believe that it will cool down in 2022. If so, the real interest rates are likely to increase, creating a downward pressure on gold prices. I also believe that the WGC is too optimistic when it comes to the real interest rates and their impact on the yellow metal. According to the report, despite the rate hikes, the real interest rates will stay low from a historical perspective, supporting gold prices. Although true, investors should remember that changes in economic variables are usually more important than their levels. Hence, the rebound in interest rates may still be harmful for the precious metals.   Implications for Gold What should be expected for gold in 2022? Will this year be similar to 2021? Well, just like last year, gold will find itself caught between a hawkish Fed and high inflation. Hence, some similarities are possible. However, in reality, we are not in a time loop and don’t have to report on Groundhog Day (phew, what a relief!). The arrow of time continues its inexorable movement into the future. Thus, market conditions evolve and history never repeats itself, but only rhymes. Thus, I bet that 2022 will be different than 2021 for gold, and we will see more volatility this year. In our particular situation, the mere expectations of a more hawkish Fed are evolving into actual actions. This is good news for the gold market, although the likely peak in inflation and normalization of real interest rates could be an important headwind for gold this year. Tomorrow, we will get to know the FOMC’s first decision on monetary policy this year, which could shake the gold market but also provide more clues for the future. Stay tuned! 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Gold: Technical Analysis, Fundamental Analysis, Macro Influences - The Latest "As Good As Gold" Is Here!

Russian Bear and Inflationary Hydra Sent Gold to $1,840

Arkadiusz Sieron Arkadiusz Sieron 20.01.2022 17:24
  Gold soared as investors got scared by reports of an allegedly impending military conflict. Was it worth reacting sharply to geopolitical factors? Gold has been performing quite nicely in January. As the chart below shows, its price increased from $1,806 at the end of December to around $1,820 this week, strengthening its position above $1,800. Yesterday (January 19, 2022), gold prices went sharply higher, jumping above $1,840, as one can see in the chart below. What happened? Investors got scared of the Russian bear and inflationary hydra. President Biden predicted that Russia would move into Ukraine. The threat of invasion and renewal of a conflict weakened risk appetite among investors. To complete the geopolitical picture, this week, North Korea fired missiles again (on Monday, the country conducted its fourth missile test of the year), while terrorists attacked the United Arab Emirates with drones. The heightened risk aversion could spur some demand for safe-haven assets such as gold. The yellow metal tends to benefit from greater uncertainty. However, investors should remember that geopolitical risks usually cause only a short-lived reaction. Investors also recalled the ongoing global inflationary crisis. Some news helped them wake up. In the U.K., inflation surged 5.4% in December, the highest since March 1992. Meanwhile, in Canada, inflation jumped 4.8%, also the fastest pace in 30 years. Additionally, crude oil prices have jumped to around $86.5 per barrel, the highest value since 2014, as the chart below shows. The timing couldn’t be worse, as inflation is already elevated, while higher oil implies higher CPI in the future. Gold should, therefore, welcome the rise in oil prices. On the other hand, it could prompt the Fed to react more forcefully and aggressively to tighten its monetary policy.   Implications for Gold What does the recent mini-rally imply for the gold market? Well, it’s never a good idea to draw far-reaching conclusions from short-term moves, especially those caused by geopolitical factors. Risk-offs and risk-on sentiments come and go. However, let’s do justice to gold. It hit a two-months high, more and more boldly settling in above $1,800. All this happened despite rising bond yields. As the chart below shows, the long-term real interest rates have increased from about -1.0% at the end of 2021 to about -0.6%. Gold’s resilience in the face of rising interest rates is praiseworthy. Having said that, investors shouldn’t forget that 2022 will be a year of the Fed’s tightening cycle, rising interest rates, and also a certain moderation in inflation. All these factors could be important headwinds for gold this year. However, investors may underestimate how the Fed’s monetary policy will impact market conditions. After all, the Fed’s hawkish stance also entails some risks for the financial markets and the overall economy. Practically, each tightening cycle in the past has led to an economic crisis. As a reminder, after four hikes in 2018, the Fed had to reverse its stance and cut them in 2019. The Fed signaled not only a few hikes this year, but also a reduction of its balance sheet. Given the enormous indebtedness of the economy and Wall Street’s addiction to easy money, it might be too much to swallow. Importantly, when the Fed is focused on fighting inflation, its ability to help the markets will be limited. I thought that such worries would arise later this year, supporting gold, but maybe the gold market has already started to price in the possibility of economic turbulence triggered by the Fed’s tightening cycle. Anyway, next week, the FOMC will gather for the first time in 2022, and it could be an important, insightful event for the gold market. Stay tuned! 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Neither Inflation nor the Fed Moves Gold

Neither Inflation nor the Fed Moves Gold

Arkadiusz Sieron Arkadiusz Sieron 18.01.2022 16:03
  Inflation spiked 7.1% in December, and the Fed is likely to raise interest rates already in March. Still, gold remains uninterested. “Inflation is too high,” admitted Lael Brainard during her nomination hearing in the Senate for the Vice Chair of the Fed. You don’t say, Governor Obvious! Indeed, the latest BLS report on inflation shows that consumer inflation rose 0.5% in December on a monthly basis, after rising 0.8% in the preceding month. The core CPI rate increased 0.6%, following a 0.6-percent increase in November. The situation is actually worse: inflation is not merely high – it’s high and still rising. As the chart below shows, the annual, seasonally adjusted CPI inflation rate spiked 7.1%, the highest move since February 1982. However, 40 years ago, inflation was coming down, and now, it is still accelerating. Inflation has been in a clear upward trend since May 2020, and getting worse month after month since August 2021 (practically, since November 2020, when we skip a short moderation in summer 2021), as the chart below shows. What is really disturbing is that core inflation, which excludes food and energy prices, spiked 5.5%, the highest since February 1991. It shows that inflation has moved deeply into the economy. It’s not a phenomenon caused merely by soaring energy prices – we are witnessing widespread, general inflation that covers practically all prices. For example, the shelter subindex, which is the biggest component of the CPI and is much less volatile than energy or food, rose 4.2% in December, the highest since February 2007, as the chart below shows. Although inflation could calm down somewhat in the first quarter of 2022 or even peak amid the spread of Omicron and the recent peak in the Producer Price Index, it’s not likely to disappear quickly. Its negative impact on the economy is beginning to be felt more and more. For instance, retail sales plunged 1.9% in December, much worse than the forecasted decline of 0.1%. The drop was caused partially by surging prices that took a big bite out of spending.   Implications for Gold What does rising inflation imply for the gold market? Well, theoretically, the yellow metal loves high and accelerating inflation, so it should shine under the current conditions. Last year, gold didn’t perform spectacularly, but it has recently managed to rise above $1,820, as the chart below shows. I wouldn’t draw too far-reaching conclusions on this basis, but at least that’s something. Inflation has been accompanied by an expanding economy last year and, more recently, also by the Fed’s more hawkish rhetoric. For a shamefully long time, the Fed kept refusing to deal with inflation. However, Powell and his colleagues have finally awoken. They’ve already accelerated the pace of tapering asset purchases and signaled successfully to the markets that they’ll likely start raising interest rates as early as March. According to the CME FedWatch Tool, the odds of a hike in the federal funds rate have risen from 46.8% last month to above 90% now. Hence, the lift-off is almost certain. The prospects of more hawkish monetary policy and the sooner start of a tightening cycle should be negative for the yellow metal, but gold didn’t care too much about a more aggressive Fed. This is encouraging, but the risk of normalization of real interest rates remains. It might also be the case that neither high inflation nor a hawkish Fed is able to shake gold out of the sideways trend right now. Let’s be patient – it might be just the silence before the storm. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Gold Wars: Revenge of Supply and Inflation

Gold Wars: Revenge of Supply and Inflation

Arkadiusz Sieron Arkadiusz Sieron 14.01.2022 16:53
  Inflation! The Republic is crumbling under attacks by the ruthless Supply Lord, Count Shortage. Dearness is everywhere. Will gold save the galaxy? If George Lucas were to make a movie about 2021 instead of Jedi knights, he would probably call it Revenge of the Supply. After all, last year will be remembered as the period of semiconductor shortages, production bottlenecks, disrupted value chains, delayed deliveries, surging job vacancies, rising inflation, and skyrocketing energy prices. It could be a shocking discovery for Keynesian economists, who focus on aggregate demand and believe that there is always slack in the economy, but it turned out that supply matters too! As a reminder, state governments couldn’t deal with the pandemic more smartly and introduced lockdowns. Then, it turned out – what a surprise! – that the shutdown of the economy, well, shut down the economy, so the Fed and the banking system boosted the money supply, while Congress passed a mammoth fiscal stimulus, including sending checks to just about every American. In other words, 2021 showed us that one cannot close and reopen the economy without any negative consequences, as the economy doesn’t simply return to the status quo. After the reopening of the economy, people started to spend all the money that was “printed” and given to them. Hence, demand increased sharply, and supply couldn’t keep up with the boosted spending. It turned out that economic problems are not always related to the demand side that has to be “stimulated”. We’ve also learned that there are supply constraints and that production and delivery don’t always go smoothly. The contemporary economy is truly global, complex, and interconnected – and the proper working of this mechanism depends on the adequate functioning of its zillion elements. Thus, shit happens from time to time. This is why it’s smart to have some gold as a portfolio insurance against tail risks. Evergiven, the ship that blocked the Suez Canal, disrupting international trade, was the perfect illustration. However, the importance of supply factors goes beyond logistics and is related to regulations, taxes, incentives, etc. Instead of calls for injecting liquidity during each crisis, efficiency, reducing the disincentives to work and invest, and unlocking the supply shackles imposed by the government should become the top economic priority. Another negative surprise for mainstream economists in 2021 was the revenge of inflation. For years, central bankers and analysts have dismissed the threat of inflation, considering it a phenomenon of the past. In the 1970s, the Fed was still learning how to conduct monetary policy. It made a few mistakes, but is much smarter today, so stagflation won’t repeat. Additionally, we live in a globalized economy with strong product competition and weak labor unions, so inflation won’t get out of control. Indeed, inflation was stubbornly low for years, despite all the easy monetary policy, and didn’t want to reach the Fed’s target of 2%, so the US central bank changed its regime to be more flexible and tolerant of inflation. It was in 2020, just one year before the outbreak of inflation. The Fed completely didn’t expect that – which shows the intellectual poverty of this institution – and called it “transitory”. Initially, inflation was supposed to be short-lived because of the “base effects”, then because of the “supply bottlenecks”. Only in November, the Fed admitted that inflation was more broad-based and would be more persistent than it previously thought. Well, better late than never! What does the revenge of supply and inflation imply for the gold market? One could expect that gold would perform better last year amid all the supply problems and a surge in inflation. We’ve learned that gold doesn’t always shine during inflationary times. The reason was that supply shortages didn’t translate into a full-blown economic crisis. On the contrary, they were caused by a strong rebound in demand; and they contributed mainly to higher inflation, which strengthened the Fed’s hawkish rhetoric and expectations of higher interest rates, creating downward pressure on gold prices. On the other hand, we could say as well that gold prices were supported by elevated inflation and didn’t drop more thanks to all the supply disruptions and inflationary threats. After all, during the economic expansion of 2011-2015 that followed the Great Recession, gold plunged about 45%, while between the 2020 peak and the end of 2021, the yellow metal lost only about 13%, as the chart below shows. Hence, the worst might be yet to come. I don’t expect a similarly deep decline as in the past, especially given that the Fed’s tightening cycle seems to be mostly priced in, but the real interest rates could normalize somewhat. Thus, I have bad news for the gold bulls. The supply crunch is expected to moderate in the second half of 2022, which would also ease inflationary pressure. To be clear, inflation won’t disappear, but it may reach a peak this year. The combination of improvement on the supply side of the economy, with inflation reaching its peak, and with a more hawkish Fed doesn’t bode well for gold. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
Powell Sends a Smile to Gold

Powell Sends a Smile to Gold

Arkadiusz Sieron Arkadiusz Sieron 14.01.2022 16:27
  Powell testified before the Senate. He didn’t say anything new, but gold rallied a bit. “We have totally screwed up inflation and now we are in deep trouble,” admitted Jerome Powell during his appearance before the Senate. OK, he didn’t formulate it exactly that way, but it was the message of his testimony. Powell admitted that the Fed wrongly expected a faster easing of supply disruptions and thought that price pressures would be much lower by now. As a consequence, inflation was believed to be only ‘transitory’. Unfortunately, that’s not what happened. “The supply-side constraints have been very durable. We are not seeing the kind of progress that all forecasters thought we’d be seeing by now. We did foresee a strong spike in demand. We didn’t know it would be so focused on goods,” saidPowell. As a result of the Fed’s inaction, inflation has risen 7% in 2021, the fastest pace since February 1982, as the chart below shows. After conducting very complicated calculations, Powell admitted that “inflation is running very far above target.” Bold deduction, Sherlock! Such high inflation is indeed a troublesome and even central bankers realize that. This is why Powell stated that “the economy no longer needs or wants the very accommodative policies we have had in place,” and that “we will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.” However, there is a problem here. The main tool the Fed has to fight inflation is raising the federal funds rate, but hiking interest rates may hamper economic expansion and even trigger the next financial crisis. As Powell admitted, “if inflation does become too persistent, that will lead to much tighter monetary policy and that could lead to a recession.” Thus, the central bank is between a rock and a hard place, between high inflation and the risk of slowing economic expansion or even of an economic crisis.   Implications for Gold What does Powell’s testimony imply for the gold market? Well, theoretically not much, as it didn’t include any major surprises. However, Powell sounded quite hawkish. For example, he downplayed the economic consequences of the current surge in coronavirus cases, and said that it’s likely not changing the Fed’s plans to tighten its monetary policy this year. These plans are relatively bold for this year: “We are going to end asset purchases in March. We will raise rates. And at some point this year will let the balance sheet runoff,” Powell said. However, it seems that Powell sounded less hawkish than investors were afraid of. Given such worries, the lack of any surprises could be dovish. This is at least what gold’s performance suggests. As the chart below shows, Powell’s testimony triggered a small rally and revived optimism in the gold market. That’s for sure encouraging. After all, gold jumped above a key level of $1,800, catching some breath, but it’s too early to call a major reversal in the gold market. The yellow metal would have to sustain itself above $1,820 and then surpass $1,850, or even higher levels, to trumpet a bullish breakout. There are still several headwinds for gold. First of all, the monetary hawks haven’t struck yet. They are growing in strength, as several regional bank presidents have recently called for a rate hike as soon as in March. Such calls may strengthen the expectations of rate increases, boosting bond yields, and creating downward pressure for gold prices. We’ll find out soon whether it will happen or not, as the January FOMC meeting is in two weeks, and it could be a groundbreaking event in the gold market. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Gold - Fed moves are likely to reveal the shape of the future

Gold - Fed moves are likely to reveal the shape of the future

Arkadiusz Sieron Arkadiusz Sieron 11.01.2022 15:10
  Job creation disappointed in December. However, it could not be enough to counterweight rising real interest rates and save gold. On Thursday (January 6, 2022), I wrote that “the metal may find itself under hawk fire in the upcoming weeks”. Indeed, gold dropped sharply in the aftermath of the publication of the FOMC minutes. As the chart below shows, the hawkish Fed’s signal sent the price of the yellow metal from $1,826 to $1,789. This is because the minutes revealed that the Fed would be ready to cut its mammoth holdings of assets later this year. Previously, the US central bank was talking only about interest rate hikes and the ending of new asset purchases, i.e., quantitative easing. Now, the reverse process, i.e., quantitative tightening, is also on the table. What is surprising here is not the mere idea of shrinking the Fed’s assets – after all, they have risen to $8.7 trillion (see the chart above) – but its timing. Last time, the central bank started the normalization of its balance sheet only in 2018, nine years after the end of the Great Recession and four years after the completion of tapering. This time, QT may start within a few months after the end of tapering and the first interest rate hikes. It looks like 2022 will be a hot year for US monetary policy – and the gold market. Consequently, markets have been increasingly pricing in a more decisive Fed, which boosted bond yields. As the chart below shows, the long-term real interest rates (10-year TIPS) jumped from -1.06% at the end of 2021 to -0.73 at the end of last week. The upward move in the interest rates is fundamentally negative for gold prices.   Implications for Gold Luckily for the yellow metal, nonfarm payrolls disappointed in December. Last month, the US labor market rose, adding just 199,000 jobs (see the chart below), well short of consensus estimates of 400,000. This negative surprise lifted gold prices slightly on Friday (January 7, 2021). The latest employment report suggests that labor shortages and the spread of the Omicron variant of coronavirus are holding back job creation and the overall economy. However, gold bulls shouldn’t count on weak job gains to trigger a sustainable rally in the precious metals. This is because the American economy is still approaching full employment. The unemployment rate declined further to 3.9% from 4.2% in November, as the chart below shows. The drop confirms that the US labor market is very tight, so weak job creation won’t discourage the Fed from hiking the federal funds rate. As a reminder, in December, FOMC members forecasted the unemployment rate to be 4.3% at the end of 2021. What is crucial here is that disappointing job gains reflect labor shortages rather than weak demand. Additionally, wage growth remains pretty fast, despite the decline in the annual rate from 5.1% in November to 4.7% in December. The key takeaway is that, despite disappointing job creation, the US economy is moving quickly towards full employment. The unemployment rate is at 3.9%, very close to the pre-pandemic low of 3.7%. Hence, the latest employment situation report may only reinforce arguments for the Fed’s tightening cycle. This is fundamentally bad news for gold, as strengthened expectations of the interest rate hikes may boost real interest rates further and put the yellow metal under downward pressure. Some analysts believe that hawkish sentiment might be at its peak. I’m not so sure about that. I believe that monetary hawks haven’t said the last word yet, and that the normalization of the interest rates is still ahead of us. Anyway, Powell will appear in the Senate today, so we should get more clues about the prospects for monetary policy and gold this year. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Gold Market in 2022: Fall and Revival?

Gold Market in 2022: Fall and Revival?

Arkadiusz Sieron Arkadiusz Sieron 07.01.2022 16:46
  2021 will be remembered as the year of inflation’s comeback and gold’s dissatisfying reaction to it. Will gold improve its behavior in 2022? You thought that 2020 was a terrible year, but we would be back to normal in 2021? Well, we haven’t quite returned to normal. After all, the epidemic is not over, as new strains of coronavirus emerged and spread last year. Actually, in some aspects, 2021 was even worse than 2020. Two years ago, the pandemic was wreaking havoc. Last year, both the pandemic and inflation were raging. To the great surprise of mainstream economists fixated on aggregate demand, 2021 would be recorded in chronicles as the year of the supply factors revenge and the great return of inflation. For years, the pundits have talked about the death of inflation and mocked anyone who pointed to its risk. Well, he who laughs last, laughs best. However, it’s laughter through inflationary tears. Given the highest inflation rate since the Great Stagflation, gold prices must have grown a lot, right? Well, not exactly. As the chart below shows, 2021 wasn’t the best year for the yellow metal. Gold lost almost 5% over the last twelve months. Although I correctly predicted that “gold’s performance in 2021 could be worse than last year”, I expected less bearish behavior. What exactly happened? From a macroeconomic perspective, the economy recovered last year. As vaccination progressed, sanitary restrictions were lifted, and risk appetite returned to the market, which hit safe-haven assets such as gold. What’s more, a rebound in economic activity and rising inflation prompted the Fed to taper its quantitative easing and introduce more hawkish rhetoric, which pushed gold prices down. As always, there were both ups and downs in the gold market last year. Gold started 2021 with a bang, but began plunging quickly amid Democrats’ success in elections, the Fed more optimistic about the economy, and rising interest rates. The slide lasted until late March, when gold found its bottom of $1,684. This is because inflation started to accelerate at that point, while the Fed was downplaying rising price pressures, gibbering about “transitory inflation”. The rising worries about high inflation and the perspective of the US central bank staying behind the curve helped gold reach $1,900 once again in early June. However, the hawkish FOMC meeting and dot-plot that came later that month created another powerful bearish wave in the gold market that lasted until the end of September. Renewed inflationary worries and rising inflation expectations pushed gold to $1,865 in mid-November. However, the Fed announced a tapering of its asset purchases, calming markets once again and regaining investors’ trust in its ability to control inflation. As consequence, gold declined below $1,800 once again and stayed there by the end of the year. What can we learn from gold’s performance in 2021? First of all, gold is not a perfect inflation hedge, as the chart below shows. I mean here that, yes, gold is sensitive to rising inflation, but a hawkish Fed beats inflation in the gold market. Thus, inflation is positive for gold only if the US central bank stays behind the curve. However, when investors believe that either inflation is temporary or that the Fed will turn more hawkish in response to upward price pressure, gold runs away into the corner. Royal metal, huh? Second, never underestimate the power of the dark… I mean, the hawkish side of the Fed – or simply, don’t fight the Fed. It turned out that the prospects of a very gradual asset tapering and tightening cycle were enough to intimidate gold. Third, real interest rates remain the key driver for gold prices. As one can see in the chart below, gold plunged each time bond yields rallied, in particular in February 2021, but also in June or November. Hence, gold positively reacts to inflation as long as inflation translates into lower real interest rates. However, if other factors – such as expectations of a more hawkish Fed – come into play and outweigh inflation, gold suffers. Great, we already know that 2021 sucked and why. However, will 2022 be better for the gold market? Although I have great sympathy for the gold bulls, I don’t have good news for them. It seems that gold’s struggle will continue this year, at least in the first months of 2022, as the Fed’s hiking cycle and rising bond yields would create downward pressure on gold. However, when the US central bank starts raising the federal funds rate, gold may find its bottom, as it did in December 2015, and begin to rally again. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
Fed Hawks Grow Stronger. Will Gold Stand Its Ground?

Fed Hawks Grow Stronger. Will Gold Stand Its Ground?

Arkadiusz Sieron Arkadiusz Sieron 06.01.2022 16:43
  2022 may be the year of Fed hawks. After tapering, they may hike rates and then start quantitative tightening. Will they tear gold apart? During the Battle of the Black Gate in the War of the Ring, Pippin : “The eagles are coming!”. It was a sign of hope for all those fighting with Sauron. Now, I could exclaim that hawks are coming, but that wouldn’t necessarily give hope to anyone fighting the bearish trends in the gold market. Yesterday (January 5, 2022), the FOMC published the minutes from its last meeting, held in mid-December. Although the publication doesn’t reveal any revolutions in US monetary policy, it strengthens the hawkish rhetoric of the Fed. Why? First, the FOMC participants acknowledged that inflation readings had been higher, more persistent, and widespread than previously anticipated. For instance, they pointed to the fact that the trimmed mean PCE inflation rate, which trims the most extreme readings and is calculated by the Dallas Fed, had reached 2.81% in November 2021, the highest level since mid-1992, as the chart below shows. It indicates that inflation is not limited to a few categories but has a broad-based character. The Committee members also noted several factors that could support strong inflationary pressure this year. They mentioned rising housing costs and rents, more widespread wage growth driven by labor shortages, and more prolonged global supply-side frictions, which could be exacerbated by the emergence of the Omicron variant; as well as easier passing on higher costs of labor and material to customers. In particular, supply chain bottlenecks and labor shortages could likely last longer and be more widespread than previously thought, which could limit businesses’ ability to address strong demand. Second, the FOMC admitted that the US labor market could be tighter than previously thought. They judged that it could reach maximum employment very soon, or that it had largely achieved it, as indicated by near-record rates of quits and job vacancies, labor shortages, and an acceleration in wage growth: Many participants judged that, if the current pace of improvement continued, labor markets would fast approach maximum employment. Several participants remarked that they viewed labor market conditions as already largely consistent with maximum employment. The consequence of higher inflation and a tighter labor market would be, of course, a more hawkish monetary policy. Although the central bankers didn’t discuss the appropriate number of interest rate hikes, they agreed that they should raise the federal funds rate sooner or faster: Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated. Additionally, Fed officials also discussed quantitative tightening. They generally agreed that – given fast economic growth, a strong labor market, high inflation, and bigger Fed assets – the balance sheet runoff should start closer to the policy rate liftoff and be faster than in the previous normalization episode: Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate. However, participants judged that the appropriate timing of balance sheet runoff would likely be closer to that of policy rate liftoff than in the Committee's previous experience. They noted that current conditions included a stronger economic outlook, higher inflation, and a larger balance sheet and thus could warrant a potentially faster pace of policy rate normalization.   Implications for Gold What do the recent FOMC minutes imply for the gold market? Well, referring once more to the Lord of the Rings, they are more like the Nazgûl that wreak despair rather than the Eagles offering hope. They were hawkish – and, thus, negative for gold prices. The minutes revealed that after tapering of quantitative easing, the Fed could also reduce its overall asset holdings to curb high inflation. In December, the US central bank accelerated the pace of tapering and signaled three interest rate increases in 2022. The minutes went even further, signaling a possibility of an earlier and faster rate hike and outright reduction in the Fed’s balance sheet: Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve's balance sheet relatively soon after beginning to raise the federal funds rate. Some participants judged that a less accommodative future stance of policy would likely be warranted and that the Committee should convey a strong commitment to address elevated inflation pressures. Hence, the price of gold responded accordingly to the FOMC minutes and declined from about $1,825 to $1,810, as the chart below shows. Luckily, there is a silver lining: the drop hasn’t been too big, at least so far. It may indicate that a lot of hawkish news has already been priced into gold, and that sentiment is rather bullish. However, the hawks haven’t probably said the last word yet. Please remember that the composition of the Committee will be more hawkish this year, but also that the mindset is changing among the members. For example, Minneapolis Fed President Neel Kashkari, one of the Committee’s most dovish members, said this week that the U.S. central bank would have to need to raise interest rates two times this year. Previously, he believed that the federal funds rate could stay at zero until at least 2024. Thus, although inflationary risk may provide support for gold, the yellow metal may find itself under hawkish fire in the upcoming weeks. We will see whether it will stand its ground, like the soldiers of Gondor. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Does gold in the beginning of 2022 remind us year 2021? What about inflation this year?

Does gold in the beginning of 2022 remind us year 2021? What about inflation this year?

Arkadiusz Sieron Arkadiusz Sieron 04.01.2022 13:14
The start of 2021 wasn’t successful for gold: after a few days of rally, the yellow metal entered a bearish trend. 2022 looks uncomfortably similar. So far, so good – the first three days of 2022 didn’t bring a new catastrophe. It’s probably just the calm before the storm, but the new year started well. Even the price of gold has risen! As the chart below shows, the yellow metal managed to jump above the key level of $1,800 at the very end of 2021, but it still maintains its position (at least as of early January 3, 2022). It reminds me of the beginning of 2021. Gold also started last year with a bang, only to plunge later. Its price increased 3.5% during the first week of the year, reaching $1,957, and then began its big downward move. As the chart below shows, the yellow metal plunged below $1,700 at the very end of March. Hence, although January is historically a good month for gold, it might be too early to celebrate, and investors should exercise caution. However, luckily for gold bulls, there is one significant difference between 2021 and 2022. Last year, there were Georgia runoffs and Democrats took over both the White House and the full Congress (the House and the Senate). That was when the blue wave plunged the yellow metal. This year should be politically calmer for the US (so, we don’t count the odds of Russia invading Ukraine and China attacking Taiwan), but the major threat to the gold market remains the same: a rise in the real interest rates. In January 2021, it was the blue wave that triggered a rebound in rates, but it may be induced by many more factors in the future. It could be the development of a new cure against coronavirus and the end of the pandemic, a more hawkish Fed, or a decline in inflation. The spread of the Omicron variant keeps worries alive. After all, as the chart below shows, the 7-day rolling average of COVID-19 cases in the United States has hit a record high of about 405,000. When we are completely back to normalcy, risk appetite and bond yields may increase. Another risk for gold is the stabilization of inflation and even subsequent disinflation. As the chart below shows, we got a one-off boost in the money supply, so inflation is likely to peak this year. Inflation expectations should ease then, and real interest rates may rebound in such a scenario. What gives me some comfort here is that the pace of money supply growth hasn’t returned to the pre-pandemic level yet, but it stays at an elevated level (although much below the peak). It should support high inflation this year. Moreover, the Fed is likely to remain behind the curve and the peak in inflation may only strengthen the dovish camp within the FOMC (although investors should remember that the composition of the voting members of the Committee has become more hawkish in 2022).   Implications for Gold What does it all imply for the gold market? Will the yellow metal resume its long-term bullish trend in 2022? Well, this is what a majority of investors that took part in Kitco News’ annual outlook survey believe. Of nearly 3,000 retail investors, 54% said they see gold prices above $2,000 by the end of the year. This is also in line with Goldman Sachs’ call for gold in 2022. Other forecasters see gold prices trading in a range between $1,800 and $2,000. It’s certainly a possible scenario. After all, much of the Fed’s tightening cycle has already been priced in; and the last time gold bottomed was in December 2015, just around the first hike in the federal funds rate after the Great Recession. However, I expect more volatile trading with strong downside potential. As a reminder, my educated guess is that gold may plunge at some point amid a rebound in bond yields, but will rise later as worries about the next economic crisis accumulate. Indeed, it’s quite funny, but I haven’t even finished this article, and the price of gold has already started to slide amid rising US dollar index and Treasury yields, in line with my warnings from the beginning of this text. This is how I became a prophet. Now I can see that as soon as you finish reading this article you will continue surfing the internet! 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, PhDSunshine Profits: Effective Investment through Diligence & Care
"Gold is in the 1960s"

"Gold is in the 1960s"

Arkadiusz Sieron Arkadiusz Sieron 31.12.2021 14:05
  Although your calendar may say otherwise, gold is in the 1960s. The question is whether we will move into the 1970s or speed-run to the mid-2010s. Did you go overboard with your time travel and lose track of time? Probably not, but just in case, I assure you that the current year is 2021. To be 100% sure, I fact-checked it on a dedicated webpage for time-travelers. However, the authority of science is being questioned, and there are people who say that, from a macroeconomic point of view, we are approaching the 1970s, or at least the 1960s. There are also voices saying that the gold market is replaying 2012-2013. Although appearances point to 2021, let’s investigate what year we really live in. The similarities with the 1970s are obvious. Just like then, we have high inflation, large fiscal deficits (see the chart below), and easy, erroneous monetary policy. Fifty years ago, the Fed blamed inflation on exogenous shocks and considered inflation to be transitory too. The new monetary regime adopted by the US central bank in 2020 also takes us back to the 70s and the mistaken belief that the economy cannot overheat, so the Fed can let inflation run above the target for a while in order to boost employment. The parallels extend beyond price pressure. The withdrawal of US troops from Afghanistan reminded many of the fall of Saigon. The world is facing an energy crisis right now, another feature of the 1970s. If we really repeat those years, gold bulls should be happy, as the yellow metal rallied from $35 to $850, surging more than 2300% back in that decade (see the chart below). However, there is one problem with this narrative. In the 1970s, we experienced stagflation, i.e., a simultaneous occurrence of high inflation and economic stagnation with a rising unemployment rate. Currently, although we face strong upward price pressure, we enjoy economic expansion and declining unemployment, as the chart below shows. Indeed, the monthly unemployment rate decreased from 14.8% in April 2020 to 4.2% in November 2021. The current macroeconomic situation, characterized by inflation without stagnation part, is reminiscent of the 1960s, a decade marked by rising inflation and rapid GDP growth. As the chart below shows, the CPI annual rate reached a local maximum of 6.4% in February 1970, similar to the current inflation level. Apparently, we are replaying the 1960s right now rather than the 1970s. So far, growth is slowing down, but we are far from stagnation territory. There is no discussion on this. My point was always that the Fed’s actions could bring us to the 1970s, or that complacency about inflation is increasing the risk of de-anchoring inflation expectations and the materialization of a stagflationary scenario. In the 1960s, the price of gold was still fixed, so historical analysis is impossible. However, it seems that gold won’t start to rally until we see some signs of stagnation or an economic crisis, and markets begin to worry about recession. Given that the current economic expansion looks intact, the yellow metal is likely to struggle at least by mid-2022 (unless supply disruptions and energy crisis intensify significantly, wreaking havoc). Do we have to go back that far in time, though? Maybe the 2020 peak in gold prices was like the 2011 peak and we are now somewhere in 2012-2013, on the eve of a great downward move in the gold market? Some similarities cannot be denied: the economy is recovering from a recession, while the Fed is tightening its monetary policy, and gold shows weakness with its inability to surpass $1,800. So, some concerns are warranted. I pointed out a long time ago the threat of an upward move in the real interest rates (as they are at record low levels), which could sink the precious metals market. However, there are two key differences compared to the 2012-2013 period. First, inflation is much higher and it’s still accelerating, while ten years ago there was disinflation. This distinction should support gold prices. The peak in the inflation rate could be a dangerous time for gold, as the disinflationary era would raise interest rates, putting downward pressure on the yellow metal. Second, the prospects of the Fed’s tightening cycle are probably already priced in. In other words, the next “taper tantrum” is not likely to happen. It implies that a sudden spike in the interest rates similar to that of 2013 (see the chart below) shouldn’t repeat now. Hence, the answer to the question “what year is it?” should be that we are somewhere in the 1960s and we can move later into the 1970s if high inflation stays with us and stagnation sets in or if the next crisis hits. However, we can leap right into the 2010s if inflation peaks soon and the hawkish Fed triggers a jump in bond yields. It’s also possible that we will see a temporary disinflation before the second wave of elevated inflation. So, gold could continue its struggle for a while before we see another rally. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
2022 and Gold

2022 and Gold

Arkadiusz Sieron Arkadiusz Sieron 30.12.2021 17:54
  2021 was bad for gold. Unfortunately, 2022 doesn’t look any better, especially at the beginning. The end, however, gives the yellow metal some hope… Bye, bye 2021! It definitely wasn’t a year of gold. As the chart below shows, the yellow metal lost 5% of its value over the last twelve months, declining from $1,887.60 on December 30, 2020, to $1,794.25 on December 29, 2021. Thus, the gold bulls won’t miss 2021, I guess. What about me? Well, I correctly predicted in January that “gold’s performance in 2021 could be worse than last year”. However, I expected more bullish behavior. I thought that rising inflation would be more supportive of gold prices. I’m fully aware that gold is not a perfect inflation hedge, but historical analysis suggests that high and accelerating inflation should be positive for gold prices. After all, inflation lowers the real interest rates, the key fundamental factor in the gold market. However, rising inflation has prompted the Fed to tighten its monetary policy and speed up the tapering of its quantitative easing. Expectations of hikes in the federal funds rate in 2022 also strengthened. In consequence, as the chart below shows, bond yields rose, especially those short- and medium-term, creating downward pressure on gold prices. Thus, we’ve learned two important lessons in 2021: don’t just count on inflation, and don’t fight with the (hawkish) Fed. As you can see, bond yields haven’t returned to their pre-pandemic level yet. Although they don’t have to fully recover, they do have room for further increases. The issue here is that when inflation peaks and disinflation starts, inflation expectations could decline, boosting the real interest rates. Actually, market-based inflation expectations already peaked in November, as shown in the chart below. This indicates that worries about inflation had calmed and investors had regained some confidence in the US central bank’s ability to contain upward price pressure.   Implications for Gold Will 2022 be better for gold than 2021? It’s possible, but I’m not an optimist. I mean here: macroeconomic conditions will turn more bearish for gold. Despite the spreading of Omicron variant of coronavirus, 2022 could mark the end of the global Covid-19 epidemic with a full economic recovery and a return to normal conditions. Fiscal policy will tighten, while the Fed will adopt a more hawkish monetary policy than in 2021. Supply shocks are easing, so inflation may peak, while real interest rates go up further. Moreover, the US dollar may strengthen against the euro, as the ECB is slower with its monetary policy tightening. On the other hand, there are also some factors that could support gold prices. In 2021, GDP rebounded greatly after the economic crisis of 2020, and financial markets also recovered robustly. 2022 may be more challenging for economic growth and the financial sector, though. One thing is the base effect, while another is central banks’ policy normalization and rising interest rates. With massive public and private debts, the Fed’s tightening cycle could deflate asset and credit bubbles and even trigger a recession, or at least a market correction. However, there are no signs of market stress yet, so a financial crisis is not in my baseline scenario for the next year. 2023 (or even later) is a more probable timeframe. Hence, I believe that the end of 2022 may be better for gold than the beginning of the year, as mere expectations of the Fed’s tightening cycle could be replaced by worries about the consequences of interest rate hikes. Anyway, 2021 is (almost) dead. Long live 2022! I wish you a return to normalcy, shining profits and all the golden next year! 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, PhDSunshine Profits: Effective Investment through Diligence & Care
S&P 500's rally to be continued?

S&P 500's rally to be continued?

Arkadiusz Sieron Arkadiusz Sieron 29.12.2021 15:31
  Stocks slightly extended their rally yesterday and the S&P 500 reached new all-time high above the 4,800 level. But will the uptrend continue? The broad stock market index lost 0.10% on Tuesday, Dec. 28, as it fluctuated following the recent record-breaking rally. The broad stock market is now way above its local highs from November and December. Stocks broke above the consolidation and we had a Santa Claus rally. The new record high is at 4,807.02. Now we may see a consolidation or a downward correction. The S&P 500 index is expected to open 0.1% lower this morning. On Dec. 3 the index fell to the local low of 4,495.12 and it was 5.24% below the previous record high. So it was a pretty mild downward correction or just a consolidation following this year’s advances. The nearest important resistance level remains at around 4,800. On the other hand, the support level is now at 4,740-4,750, marked by the previous highs. The S&P 500 broke above its two-month long consolidation, as we can see on the daily chart (chart by courtesy of http://stockcharts.com): Nasdaq 100 Remains Below the November High Let’s take a look at the Nasdaq 100 chart. The technology index is relatively weaker than the broad stock market’s gauge as it is still trading below the Nov. 22 record high of 16,764.85. The recent rally in stocks was driven by a handful of stocks and the technology stocks were just retracing their recent declines. However, the Nasdaq 100 broke above the resistance level of 16,400. Apple’s Market Cap Gets Close to $3 Trillion Again Apple stock got back close to its Dec. 13 record high of $182.13. The nearest important resistance level is at $180-182. The stock remains above its two-month long upward trend line. There have been no confirmed negative signals so far, however, the market may be trading within a medium-term topping pattern. It’s getting very hard to fundamentally justify the Apple’s current market capitalization of around $3 trillion. Conclusion The S&P 500 index will most likely fluctuate following the recent record-breaking rally. We may see some profit trading action and a consolidation along the 4,800 level. There have been no confirmed negative signals so far. However, there are some short-term overbought conditions. Here’s the breakdown: The S&P 500 will likely fluctuate following the recent rally. We may see a consolidation or a downward correction at some point. In our opinion no positions are currently justified from the risk/reward point of view. Like what you’ve read? Subscribe for our daily newsletter today, and you'll get 7 days of FREE access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today! Thank you. Paul Rejczak,Stock Trading StrategistSunshine Profits: Effective Investments through Diligence and Care * * * * * The information above represents analyses and opinions of Paul Rejczak & Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. At the time of writing, we base our opinions and analyses on facts and data sourced from respective essays and their authors. Although formed on top of careful research and reputably accurate sources, Paul Rejczak and his associates cannot guarantee the reported data's accuracy and thoroughness. The opinions published above neither recommend nor offer any securities transaction. Mr. Rejczak is not a Registered Securities Advisor. By reading his reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Paul Rejczak, Sunshine Profits' employees, affiliates as well as their family members may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
Gold and inflation

Gold and inflation

Arkadiusz Sieron Arkadiusz Sieron 28.12.2021 16:28
High inflation won’t go away in 2022. Good for gold. However, it is likely to continue to climb and reach its peak. That sounds a bit worse for gold. If 2021 was tough for you, I don’t recommend reading Nostradamus’ predictions for the next year. This famous French astrologer saw inflation, hunger, and much more coming in 2022: So high the price of wheat, That man is stirred His fellow man to eat in his despair Yuk! So, life is about to get a little more complicated: we must now avoid becoming infected and being eaten by our fellow citizens! If you are interested in how cannibalism will affect the gold market, I’m afraid that I don’t have adequate data. Anyway, if you end up in the pot together with vegetables and your colleagues, gold’s performance probably won’t be your top priority. Hence, let’s focus on inflation. Last week, the Bureau of Economic Analysis released the latest data on the Personal Consumption Expenditures Price Index. This measure of inflation surged 5.7% in the 12 months ended in November, which was the fastest increase since July 1982. Meanwhile, as the chart below shows, the core index, which excludes energy and food, rose 4.7%. It was the highest jump since February 1989. This is very important, as it shows that inflation is not elevated merely by rising energy prices. Instead, it’s more broad-based, which can make inflation more lasting. Indeed, there are strong reasons to expect that high inflation will stay with us in 2022. As the chart below shows, the shelter index – the biggest CPI component – has been rising recently, which should move the whole index up. In other words, surging home prices could translate into higher rents, supporting consumer inflation. Additionally, the Producer Price Index has also been rallying this year. The final demand index rose 9.6% on an annual basis in November, the largest advance since 12-month data was first calculated in late 2010. Moreover, the commodity index surged 23%, and it was the highest jump since November 1974. All this indicates that inflationary pressure remains strong. Implications for Gold To be clear, inflation will eventually peak, and this will probably happen in 2022. This is because a one-time helicopter drop (the surge in the money supply) leads to a one-time jump in the price level. However, inflation is like toothpaste. It’s easy to get it out, but it’s difficult to get it back in again. To use another metaphor, if you wait with your actions until you see the whites of the eyes of a tiger, you can be eaten (sorry for being monothematic today!). This was exactly the Fed’s strategy with the inflationary tiger for most of 2021. Yes, the US central bank accelerated tapering of quantitative easing in December, but it remains behind the curve (or, to continue the metaphor, it’s still holding the tiger by the tail). What does it all mean for the gold market? High inflation should support gold prices. The expectations of a more hawkish Fed probably prevent a big rally, but ultra-low real interest rates are supportive of the yellow metal. However, what is one of my biggest worries for the next year (except for the perspective of being eaten by hungry neighbors) is how gold will react to the peak in inflation. Although inflation will stay elevated, it won’t rise indefinitely. When it peaks, real interest rates could go up, negatively affecting the yellow metal. Of course, one would say that the peak of inflation would be accompanied by a more dovish Fed, so disinflation doesn’t have to hurt gold, just as rising inflation didn’t make it shine. However, this is not so simple, and if inflation stays above 5%, the Fed could still feel obligated to act and bring inflation to its 2% target. Anyway, US monetary policy (together with fiscal policy) will be tighter compared to 2020 and to other major countries, which (together with a likely peak in inflation) creates a rather challenging macroeconomic environment for gold in 2022 (at least until worries about the negative consequences of the Fed’s tightening cycle emerge). 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Is the End of Transitory Inflation the End of Gold Bulls?

Is the End of Transitory Inflation the End of Gold Bulls?

Arkadiusz Sieron Arkadiusz Sieron 24.12.2021 11:18
The debate about the nature of inflation is over. Now the question is what the end of transitory inflation implies for gold. I offer two perspectives. Welcome, my son. Welcome to the inflationary machine. Welcome to the new economic regime of elevated inflation. That’s official because even central bankers have finally admitted what I’ve been saying for a long time: the current high inflation is not merely a transitory one-off price shock. In a testimony before Congress, Jerome Powell agreed that “it’s probably a good time to retire” the word “transitory” in relation to inflation. Bravo, Jay! It took you only several months longer than my freshmen students to figure it out, but better late than never. Actually, even a moderately intelligent chimpanzee would notice that inflation is not merely temporary just by looking at the graph below. To be clear, I’m not predicting hyperinflation or even galloping inflation. Nor do I claim that at least some of the current inflationary pressures won’t subside next year. No, some supply-side factors behind recent price surges are likely to abate in 2022. However, other drivers will persist, or even intensify (think about housing inflation or energy crisis). Let’s be honest: we are facing a global inflation shock right now. In many countries, inflation has reached its highest rate in decades. In the United States, the annual CPI rate is 6.2%, while it reached 5.2% in Germany, 4.9% in the Eurozone, and 3.8% in the United Kingdom. The shameful secret is that central banks and governments played a key role in fueling this inflation. As the famous Austrian economist Ludwig von Mises noticed once, The most important thing to remember is that inflation is not an act of God; inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy — a deliberate policy of people who resort to inflation because they consider it to be a lesser evil than unemployment. But the fact is that, in the not very long run, inflation does not cure unemployment. Indeed, the Fed and the banking system injected a lot of money into the economy and also created room for the government to boost its spending and send checks to Americans. The resulting consumer spending boom clogged the supply chains and caused a jump in inflation. Obviously, the policymakers don’t want to admit their guilt and that they have anything to do with inflation. At the beginning, they claim that there is no inflation at all. Next, they say that inflation may exist after all, but is only caused by the “base effect”, so it will be a short-lived phenomenon that results solely from the nature of the yearly comparison. Lastly, they admit that there is something beyond the “base effect” but inflation will be transitory because it’s caused only by a few exceptional components of the overall index, the outliers like used cars this year. Nothing to worry about, then. Higher prices are a result of bottlenecks that will abate very soon on their own. Later, inflation is admitted to be more broad-based and persistent, but it is said to be caused by greedy businesses and speculators who raise prices maliciously. Finally, the policymakers present themselves as the salvation from the inflation problem(that was caused by them in the first place). Such brilliant “solutions” as subsidies to consumers and price controls are introduced and further disrupt the economy. The Fed has recently admitted that inflation is not merely transitory, so if the abovementioned scheme is adequate, we should expect to look for scapegoats and possibly also interventions in the economy to heroically fight inflation. Gold could benefit from such rhetoric, as it could increase demand for safe-haven assets and inflation hedges. However, the Fed’s capitulation also implies a hawkish shift. If inflation is more persistent, the US central bank will have to act in a more decisive way, as inflation won’t subside on its own. The faster pace of quantitative easing tapering and the sooner interest rate hikes imply higher bond yields and a stronger greenback, so they are clearly negative for gold prices. Having said that, the Fed stays and is likely to stay woefully behind the curve. The real federal funds rate (i.e., adjusted by the CPI annual rate) is currently at -6.1%, which is the deepest level in history, as the chart below shows. It is much deeper than it was at the lows of stagflation in the 1970s, which may create certain problems in the future. What is important here is that even when the Fed raises the federal funds rate by one percentage point next year, and even when inflation declines by another two percentage points, the real federal funds rate will increase to only -3%, so it will stay deeply in negative territory. Surely, the upward direction should be negative for gold prices, and the bottom in real interest rates would be a strong bearish signal for gold. However, rates remaining well below zero should provide some support or at least a decent floor for gold prices (i.e., higher than the levels touched by gold in the mid-2010s). Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
Gold christmas tree?

Gold christmas tree?

Arkadiusz Sieron Arkadiusz Sieron 23.12.2021 12:25
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. 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. 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. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Powell Sent Gold Above $1,800 – But Only for a Short While

Powell Sent Gold Above $1,800 – But Only for a Short While

Arkadiusz Sieron Arkadiusz Sieron 21.12.2021 13:34
Finally, Powell admitted higher inflation risks and gold jumped above $1,800. Before anyone noticed, however, it plummeted below the key level again. Who are you, Mr. Powell: a reptilian or a human? A dove or a hawk? Since we all know the answer to the first question, let’s focus on the second one. Markets decided that Powell’s last press conference was rather dovish, but a careful reading doesn’t support this view. The main dovish signal was Powell’s emphasis that quantitative easing tapering and interest rate hikes are separate issues, as the tightening cycle criteria are stricter. So, the first rate hike may not come immediately after the end of tapering, which is scheduled for mid-March. Even if they are separate, we shouldn’t expect a long break between the end of quantitative easing and the first rate hike. This gap will definitely be shorter than in 2014-2015. In the last tightening cycle, the Fed ended asset purchases in October 2014, while the first increase in the federal funds rate occurred in December 2015. Powell himself, however, pointed out that the economy is much stronger, while inflation is much higher, so a long separation before interest rate hikes is not likely: I don't foresee that there would be that kind of very extended wait at this time. The economy is so much stronger. I was here at the Fed when we lifted it off last time and the economy is so much stronger now, so much closer to full employment. Inflation is running well above target and growth as well above potential. There wouldn't be the need for that kind of long delay (…) The last cycle that was quite a long separation before interest rates, I don't think that's at all likely in this cycle. We're in a very, very different place with high inflation, strong growth, a really strong economy (…) So this is a strong economy, one in which it's appropriate for interest rate hikes. In fact, this delay may be very short. On Friday, Fed Governor Chris Waller said that the interest rate increase will likely be warranted “shortly after” the end of asset purchases, possibly even at the FOMC meeting in March 2022. Another hawkish message sent by Powell was his acknowledgment of stronger inflation risks, i.e., that inflation may turn out to be more lasting than expected now: There’s a real risk now, we believe, I believe, that inflation may be more persistent and that may be putting inflation expectations under pressure. And that the risk of higher inflation becoming entrenched has increased, it’s certainly increased. I don’t think it’s high at this moment, but I think it’s increased. And I think that’s part of the reason behind our move today, is to put ourselves in a position to be able to deal with that risk. Thus, the Fed has become more concerned about high inflation and has timidly started reacting to it. The acceleration in the pace of tapering was, except for the more hawkish rhetoric, the first step – but not the last one.   Implications for Gold The yellow metal responded surprisingly well to the last FOMC meeting, at which the Fed announced a more aggressive pace of tapering and rate hikes next year. As the chart below shows, gold rose almost $40, or more than 2%, from Wednesday to Friday last week, jumping again above the key level of $1,800. Perhaps investors expected even more forceful actions. After all, despite all the hawkish reaction, the Fed remains behind the curve and shows no hurry to become really proactive. Such a passive attitude is really risky, as history teaches us that high inflation doesn’t just go away on its own, but its stabilization requires a decisive tightening of monetary policy. The longer the Fed waits, the more severe reaction would be needed, which increases the odds of putting the economy into recession. All this seems bullish for gold prices. However, gold was unable to retain its position above $1,800 and declined on Monday (December 20, 2021), so gold bulls can only hope that the yellow metal will the find strength to rally next year. It’s possible if inflation wreaks more havoc in 2022, but a hawkish Fed’s rhetoric remains an important headwind for the gold market. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Not Only Gold Lacks Energy – We All Do Now

Not Only Gold Lacks Energy – We All Do Now

Arkadiusz Sieron Arkadiusz Sieron 17.12.2021 15:19
  First a pandemic, then inflation, and now an energy crisis. Should you buy gold when preparing for the winter? Brace yourselves, winter is coming! And this time I’m deadly serious, as there is a global energy crisis. Not only does gold lack energy to fuel its rally right now, but people from all over the world lack it to fuel their operations and to heat their houses. Apparently, the coronavirus pandemic wasn’t enough, so we also have to deal with inflation, supply bottlenecks, and the energy crisis. I guess there is nothing else to do now but wait for the frogs to start falling from the sky. But let’s not give the gods ideas and focus on the energy crisis today. What is it about? A picture is worth a thousand words, so please take a look at the chart below, which presents the Dutch Title Transfer Facility, Europe’s leading benchmark for natural gas prices. As you can see, future prices for European natural gas have skyrocketed to a record level in October 2021, surging several times from their low in May 2020. The persistence and global dimension of these price spikes are unprecedented, as natural gas prices have also surged in Asia and America (although to a lesser degree). What caused such a spike? Well, as a trained economist, I cannot resist answering that it’s a matter of demand and supply! Yeah, thank you, Captain Obvious, but could you be a little more specific? Sure, so on the demand side, we have to mention a fast recovery from the epidemic and cold fall that increased the use of energy. Oh, and don’t forget about the ultra-low interest rates and the increase in the money supply that boosted spending on practically everything. The increased demand for energy is hardly surprising in such conditions. On the supply side, there were unpredictable breakdowns of gas infrastructure in Russia and Norway that decreased deliveries. The former country reduced its exports due to political reasons. What’s more, the reduction in the supply of CO2 emission rights and unfavorable weather didn’t help. The windless conditions in Europe generated little wind energy, while drought in Brazil reduced hydropower energy. More fundamentally, the decline in energy prices in response to the economic crisis of 2020 prompted many producers to stop drilling and later supply simply didn’t catch up with surging demand. You can also add here the political decisions to move away from nuclear and carbon energy in some countries. Last but not least, the butterfly’s wings flapped in China. Coal production in that country plunged this year amid a campaign against corruption and floods that deluged some mines. Middle Kingdom therefore began to buy significant amounts of natural gas, sharply increasing its prices. China’s ban on importing coal from Australia, of course, didn’t help here. Great, but what does the energy crisis imply for the global economy and the gold market? First, shortages of energy could be a drag on global GDP. The slowdown in economic growth should be positive for gold, as it would bring us closer to stagflation. Second, the energy crisis could cause discontent among citizens and strengthen the populists. People are already fed up with pandemics and high inflation, and now they have to pay much higher energy bills. Just imagine how they will cheer when blackouts occur. Third, the surge in natural gas prices could support high producer and consumer inflation. We are already observing some ripple effects in the coal and oil markets that could also translate into elevated CPI numbers. Another inflationary factor is power shortages in China, as they will add to the supply disruptions we are currently facing. All this implies more persistent high inflation, which should provide support for the yellow metal as an inflation hedge, although it also increases the odds of a more hawkish Fed, which is rather negative for gold. It’s true that a replay of the 1970s-like energy crisis is remote, as today’s economies are much less energy-consuming and dependent on fossil fuels. However, the worst is possibly yet to come. After all, winter hasn’t arrived yet – and it could be another harsh one, especially given that La Niña is expected to be present for the second year in a row. Meanwhile, gas stocks are unusually low. You can connect the dots. So far, gold has rather ignored the unfolding energy crisis, but we’ve already seen that market narratives can change quickly. It’s therefore possible that prolonged supply disruption and high inflation could change investors’ attitude toward the yellow metal at some point. The weak gold’s reaction stems from the limited energy crisis in the US and from the focus on the Fed’s tightening cycle. But investors’ attention can shift, especially when the Fed starts hiking federal funds rate. Brace yourselves! Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
Inflation Beast Roars - Gold Only Modestly Up

Inflation Beast Roars - Gold Only Modestly Up

Arkadiusz Sieron Arkadiusz Sieron 14.12.2021 17:09
  The inflation beast is growing stronger. Unfortunately for gold bulls, we cannot say the same about the yellow metal. Is sacrifice going on tomorrow? “Woe to you, oh earth and sea, for the Devil sends the beast with wrath, because he knows the time is short (...). Let him that hath understanding count the number of the beast,” says the Bible. The current number of the beast is not 6.66%, but 6.8% - this is how high the CPI annual inflation rate was in November. The number came above expectations and implies further acceleration in inflation from 6.2% in October. It was also the largest 12-month increase since the period ending June 1982, as the chart below indicates. The latest BLS report on inflation also shows that consumer inflation rose 0.8% on a monthly basis after rising 0.9% in October. The core CPI rate increased 0.5% in November, following a 0.6-percent increase in the previous month. On an annual basis, it jumped 5% after a 4.6% increase in October (see the chart above). So, as , “hell and fire was spawned to be released”. Indeed, November readings clearly falsify central banks’ narrative about transitory inflation (which was already partially abandoned) and confirm my claim that inflation will stay with us for longer. As a reminder, my bet is that we will see the peak of inflation no earlier than somewhere in Q1 2022. Actually, it might be even a bit later, as the Omicron coronavirus variant could contribute to supply disruptions and add to inflationary pressure. What’s important here is to remember that current inflation is not merely a supply problem. It’s true that the energy index is surging, but the shelter index is also rising, and it has even surpassed the pre-pandemic level, as the chart below shows. So, inflation has a really broad nature, which makes perfect sense, as it was caused by a boost in the money supply and strong demand. The BLS report confirms this view: “The monthly all items seasonally adjusted increase was the result of broad increases in most component indexes, similar to last month.”   Implications for Gold The inflationary beast not only reared its ugly head, but it started roaring and growing stronger. The CPI inflation rate jumped to 6.8% in November, and it’s probably not the final number! Actually, it could have been even higher if the Omicron variant of coronavirus had not emerged, slowing down some expenditures. What does this acceleration imply for the gold market? Well, one week ago I wrote: “My bet is that inflation will stay elevated or that it could actually intensify further. In any case, the persistence of high inflation could trigger some worries and boost the safe-haven demand for gold.” Indeed, inflationary pressure intensified further, which pushed gold prices higher, as the chart below shows. However, I also expressed concerns about the Fed’s reaction to high inflation and its implications for gold: I’m afraid that gold bulls’ joy would be – to use a trendy word – transitory. The December FOMC meeting will be probably hawkish and will send gold prices down. Given the persistence of inflation, the Fed is likely to turn more hawkish and accelerate the pace of tapering. The higher than expected inflation rate in November, and a very modest gold’s reaction to it, only strengthen my fears that tomorrow could be a great day for monetary hawks and a sad day for gold. Given such high inflation, the Fed has simply no choice and must accelerate the pace of the tapering and hiking cycle. So, to paraphrase Iron Maiden, sacrifice is going on tomorrow. On the other hand, gold often bottomed out in December historically (in recent years, it did so in 2015, 2016, 2017, and 2019). We’ll find out soon whether my fears were justified! 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Another 4 Years of Gold’s Tricky Romance With Jay

Another 4 Years of Gold’s Tricky Romance With Jay

Arkadiusz Sieron Arkadiusz Sieron 10.12.2021 16:45
  “Do you love me?”, asked gold. “Of course, my dear”, replied Jay, but his thoughts were with others: asset purchases tapering and interest rate hikes. “It’s complicated” – this is how many people answer questions about their romantic lives. The relationship between gold and Jerome Powell is also not a clear one. As you know, in November, President Biden announced that he would reappoint Powell for the second term as the Fed Chair. It means that gold will have to live with Jerome under the same roof for another four years. To say that gold didn’t like it is to say nothing. The yellow metal snapped and left the cozy living room of $1,850, slamming the door loudly. In less literary expressions, its price plunged from above $1,860 on November 19 to $1,782 on November 24, 2021, as the chart below shows. The impulsive gold’s reaction to Powell’s renomination resulted from its failed dream about a love affair with Lael Brainard. She was considered a leading contender to replace Powell. The contender that would be more dovish and, thus, more supportive of gold prices. However, is a hawkish dove a hawk? Is Powell really a hawk? Even if more hawkish than Brainard, he still orchestrated an unprecedentedly accommodative monetary policy in response to the pandemic-related economic crisis. It was none other than Powell who started to cut interest rates in 2019, a year before the epidemic outbreak. It was he who implemented an inflation-averaging regime that allowed inflation to run above the target. Right now, it’s also Powell who claims that the current high inflation is transitory, although it’s clear for almost everyone else that it’s more persistent. I wouldn’t call Powell a hawk then. He is rather a dove in a hawk’s clothing. So, gold doesn’t have to suffer under Powell’s second term as the Fed Chair. Please take a look at the chart below, which shows gold’s performance in the period of 2017-2021. As you can see, the yellow metal gained about 34% during Powell’s first term as the chair of the Federal Reserve that started in February 2018 (or 40% since Trump’s November 2017 nomination of the Fed). Not bad! Actually, gold performed much better back then than under Yellen’s term as the Fed Chair. During her tenure, which took place in 2014-2018, the yellow metal was traded sideways, remaining generally in a corridor between $1,100-$1,300. I’m not saying that Yellen despised gold, while Powell loves it. My point is that gold’s performance during the tenures of Fed Chairs varies along with changes in the macroeconomic environment in which they act and the monetary stance they adopt. Gold suffered strongly until December 2015, when Yellen finally started hiking the federal funds rate. It then rebounded, only to struggle again in 2018 amid an aggressive tightening cycle. However, at the end of that year it started to rally due to a dovish shift within the Fed, and, of course, in a lagged response to unprecedented fiscal and monetary actions later in 2020. I have bad and good news here. The former is that the macroeconomic environment during Powell’s second term could be more inflationary, demanding more hawkish actions. The Fed has already started tapering of its quantitative easing, and bets are accumulating that it could start hiking interest rates somewhere around mid-2022. What’s more, the continuation of Powell’s leadership ensures more stability and provides markets with more certainty about what to expect from the Fed in the coming years. This is bad news for safe-haven assets such as gold. Last but not least, the composition of the FOMC is going to shift toward the hawkish side. This is because some strong doves, such as Daly and Evans, are out, while some notable hawks, such as George, Mester (and also Bullard), are among the voting members in 2022. Gold may, therefore, find itself under downward pressure next year, especially in its first half. On the other hand, the current FOMC expresses clearly dovish bias. With mammoth public debt and elevated asset prices, aggressive tightening would simply be very risky from a financial and political point of view. So, the Fed is likely to generally remain behind the curve. By the way, Biden not only reappointed Powell for the second term as Fed Chair, but he also appointed Brainard as Vice-Chair. We also can’t exclude that Biden agreed to Powell’s second term only if he conducts “appropriate” monetary policy. Democratic Senator Elizabeth Warren once called Powell “a dangerous man.” Well, in a way, it’s true, as powerful people can be dangerous. However, history shows that Powell doesn’t have to be a threat to gold. After all, he is not a hawk in the mold of Paul Volcker, but merely a hawkish dove, or a dove that will have to normalize the crisis monetary policy and curb inflation. In the upcoming months, gold may struggle amid prospects of more interest rates hikes and likely strengthened hawkish rhetoric from the Fed. However, precious metals investors often sell the rumor and buy the fact. So, when the US central bank finally delivers them, better times may come for the yellow metal, and gold and Jay could live happily ever after. The End. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
Gold Stuck Between High Inflation and Strong Dollar

Gold Stuck Between High Inflation and Strong Dollar

Arkadiusz Sieron Arkadiusz Sieron 09.12.2021 16:46
  Inflation supports gold, the expected Fed’s reaction to price pressure – not. Since gold ended November with a small gain, what will December bring? I have good and bad news. The good is that the price of gold rose 2% in November. The bad –is that the price of gold rose 2% in November. It depends on the perspective we adopt. Given all the hawkish signals sent by the Fed and all the talk about tapering of quantitative easing and the upcoming tightening cycle, even a small increase is an admirable achievement. However, if we focus on the fact that US consumer inflation rose in October to its highest level in 30 years, and that real interest rates have stayed deeply in negative territory, gold’s inability to move and stay above $1,800 looks discouraging. We can also look at it differently. The good news would be that gold jumped to $1,865 in mid-November. The bad news, on the other hand, would be that this rally was short-lived with gold prices returning to their trading range of $1,750-$1,800 in the second half of the month, as the chart below shows. Now, according to the newest WGC’s Gold Market Commentary, gold’s performance in November resulted from the fact that higher inflation expectations were offset by a stronger dollar and rising bond yields that followed Powell’s nomination for the Fed Chair for the second term. Indeed, as you can see in the chart below, the greenback strengthened significantly in November, and real interest rates rallied for a while. Given the scale of the upward move in the dollar, and that it was combined with a surge in yields, gold’s performance last month indicates strength rather than weakness. As the WGC notes, “dollar strength was a headwind in November, acting as a drag on gold’s performance, but not enough to outweigh inflation concerns.”   Implications for Gold Great, but what’s next for the gold market in December and 2022? Well, that’s a good question. The WGC points out that “gold remains heavily influenced by investors’ continued focus on the path of inflation (…) and the Fed’s and other central banks’ potential reaction to it.” I agree. Inflation worries increase demand for gold as an inflation hedge, supporting gold, but they also create expectations for a more hawkish Fed, hitting the yellow metal. It seems that the upcoming days will be crucial for gold. Tomorrow (December 10, 2021), we will get to know CPI data for November. And on Wednesday (December 15, 2021), the FOMC will release its statement on monetary policy and updated dot plot. My bet is that inflation will stay elevated or that it could actually intensify further. In any case, the persistence of high inflation could trigger some worries and boost the safe-haven demand for gold. However, I’m afraid that gold bulls’ joy would be – to use a trendy word – transitory. The December FOMC meeting will probably be hawkish and will send gold prices down. Given the persistence of inflation, the Fed is likely to turn more hawkish and accelerate the pace of tapering. Of course, if the Fed surprises us on a dovish side, gold should shine. What’s more, the hawkish tone is widely expected, so it might be the case that all the nasty implications are already priced in. We might see a “sell the rumor, buy the fact” scenario, but I’m not so sure about it. The few last dot-plots surprised the markets on a hawkish side, pushing gold prices down. I’m afraid that this is what will happen again. Next week, the Fed could open the door to earlier rate hikes than previously projected. Hence, bond yields could surge again, making gold move in the opposite direction. You’ve been warned! 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Weak November Payrolls Won’t Help Gold

Weak November Payrolls Won’t Help Gold

Arkadiusz Sieron Arkadiusz Sieron 07.12.2021 17:14
  November employment report was mixed. Unfortunately for gold, however, it won’t stop the Fed’s hawkish agenda. Nonfarm payrolls disappointed in November. As the chart below shows, the US labor market added only 210,000 jobs last month. This number is much lower than both October’s figure (546,000 gains) and the market expectations (MarketWatch’s analysts forecasted 573,000 added jobs). So, it’s a huge blow to those optimistic about the US economy. However, this is a huge blow that nobody will care about because the disappointing payrolls were accompanied by a big decline in unemployment. As the chart above shows, the unemployment rate decreased by 0.4 percentage points, from 4.6% in October to 4.2% in November. What’s more, the unemployment rate declined simultaneously with the increases in both the labor-force participation rate (from 61.6% to 61.8%) and the employment-to-population ratio (from 58.8% to 59.2%). This means that the reduction in unemployment was genuine and rather not a result of dropping out from the labor market. Additionally, wage inflation has slowed down from 4.84% in October to 4.8% in November, remaining below expectations, which could slightly ease inflationary concerns. Last but not least, after revisions, employment in September and October combined was reported to be 82,000 higher than previously indicated, and the monthly job growth has averaged 555,000 so far this year. Therefore, even a weak November doesn’t change the fact that 2021 marked a great improvement in the US labor market.   Implications for Gold What does the November employment report imply for the gold market? The nonfarm payrolls disappointed, but it’s not enough to stop the Fed from accelerating the pace of tapering its quantitative easing, especially given the significant reduction in the unemployment rate. So, the hawkish revolution won’t be stopped. It may even be strengthened, as a big decline in unemployment brings us closer to “full employment” and meeting the criteria for hiking interest rates. This is, of course, not good news for the gold bulls. After hearing worries about inflation a few weeks ago, the Fed managed to calm investors. They’ve believed that Powell and his colleagues would take the inflationary threat seriously. Markets now expect a speed-up in the pace of tapering in December and as much as three interest rates hikes in 2022 (there are even investors who bet on seven hikes by the end of the next year!). However, there is a silver lining here. With the unemployment rate at 4.2%, the potential for further improvement is rather limited. And when a new upward trend begins, we will have rising unemployment rate and high inflation at the same time. Such conditions create stagflation, which would take gold higher. This is still a song of the future, though. Let’s focus on the recent past: gold prices increased slightly on Friday (December 3, 2021). Although the London P.M. Fix hardly changed (see the chart below), the New York price rebounded to about $1,783 on Friday from $1,769 the day before. However, it doesn’t change the fact that gold remains stuck in a sideways trend below $1,800, as concerns about inflation exist along with expectations of a more aggressive Fed tightening cycle. Luckily for gold, despite its hawkish rhetoric, the US central bank will remain behind the inflation curve. The cautious, dovish policy is simply too tempting, as hitting the brakes too hard could trigger a financial crisis and a recession. With the CPI annual rate above 6%, the Fed should have already hiked the federal funds rate instead of waiting until Q2 2022. And even with three 25-basis point hikes, real interest rates will remain deeply in negative territory, which should be supportive of gold prices. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Hawks Triumph, Doves Lose, Gold Bulls Cry!

Hawks Triumph, Doves Lose, Gold Bulls Cry!

Arkadiusz Sieron Arkadiusz Sieron 02.12.2021 17:20
The hawkish revolution continues. Powell, among the screams of monetary doves, suggested this week that tapering could be accelerated in December! People live unaware that an epic battle between good and evil, the light and dark side of the Force, hard-working entrepreneurs and tax officials is waged every day. What’s more, hawks and doves constantly fight as well, and this week brought a victory for the hawks among the FOMC. The triumph came on Tuesday when Fed Chair Jerome Powell testified before Congress. He admitted that inflation wasn’t “transitory”, as it is only expected to ease in the second half of 2022. Inflation is therefore more persistent and broad-based than the Fed stubbornly maintained earlier this year, contrary to evidence and common sense: Generally, the higher prices we’re seeing are related to the supply and demand imbalances that can be traced directly back to the pandemic and the reopening of the economy. But it’s also the case that price increases have spread much more broadly and I think the risk of higher inflation has increased. Importantly, Powell also agreed that “it’s probably a good time to retire that word.” You don’t say! Hence, the Fed was wrong, and I was right. Hurray! However, it’s a Pyrrhic victory for gold bulls. This is because the recognition of the persistence of inflation pushes the Fed toward a more hawkish position. Indeed, Powell suggested that the FOMC participants could discuss speeding up the taper of quantitative easing in December: At this point the economy is very strong and inflationary pressures are high and it is therefore appropriate, in my view, to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner, and I expect that we will discuss that at our upcoming meeting in a couple of weeks. What’s more, Powell seemed to be unaffected by the Omicron coronavirus strain news. He was a bit concerned, but not about its disturbing impact on the demand side of the economy; he found supply-chain disruptions that could intensify inflation way more important. That’s yet another manifestation of Powell’s hawkish stance.   Implications for Gold What does the Fed’s hawkish tilt imply for the gold market? Well, gold bulls get along with doves, not hawks. A more aggressive tightening cycle, including faster tapering of asset purchases, could boost expectations of more decisive interest rates hikes. In turn, the prospects of a more hawkish Fed could increase the bond yields and strengthen the US dollar. All this sounds bearish for gold. Indeed, the London price of gold dropped on Wednesday below $1,800… again, as the chart above shows. Hence, gold’s inability to stay above $1,800 is disappointing, especially in the face of high inflation and market uncertainty. Investors seem to have once again believed that the Fed will be curbing inflation. Well, that’s possible, but my claim is that despite a likely acceleration in the pace of the taper, inflation will remain high for a while. I bet that despite the recent hawkish tilt, the Fed will stay behind the curve. This means that the real interest rates should stay negative, providing support for gold prices. The previous tightening cycle brought the federal funds rate to 2.25-2.5%, and we know that after an economic crisis, interest rates never return to the pre-crisis level. This is also what the euro-dollar futures suggests: that the upcoming rate hike cycle will end below 2%. The level of indebtedness and financial markets’ addiction to easy money simply do not allow the Fed to undertake more aggressive actions. Will gold struggle in the upcoming months then? Yes. Gold bulls could cry. But remember: tears cleanse and create more room for joy in the future. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
The Fed Worries About Inflation. Should We Worry About Gold?

The Fed Worries About Inflation. Should We Worry About Gold?

Arkadiusz Sieron Arkadiusz Sieron 30.11.2021 16:43
Oops!... Gold did it again and declined below $1,800 last week. What’s happening in the gold market? Did you enjoy your roast turkey? I hope so, and I hope that its taste – and Thanksgiving in general – sweetened the recent declines in gold prices. As the chart below shows, the price of the yellow metal (London P.M. Fix) plunged from above $1,860 two weeks ago to above $1,780 last week. It has slightly rebounded since then, but, well, only slightly. What exactly happened? Funny thing, but actually nothing revolutionary. After all, the reappointment of the same man as the Fed Chair and the publication of the FOMC minutes from the meeting that had already took place earlier in November, were the highlights before Thanksgiving. Well, sometimes lack of changes is a change itself and information about the past can shed some light on the future. Let’s start from Powell’s renomination for the second term as the Federal Reserve chair. In response, the market bets that the Fed will hike interest rates more aggressively in 2022 have increased. At first glance, the strong investors’ reaction seems strange, given that the monetary policy shouldn’t radically change with Powell still at the helm. However, the continuation of Powell’s leadership implies that Lael Brainard, regarded as more dovish than Powell, won’t become the new Fed Chair – what was expected by some market participants. Hence, the dovish scenario won’t materialize, which is hawkish for gold. Just two days later, the FOMC revealed the minutes from its November meeting. The main message – the Fed decided to taper its quantitative easing – was, of course, included in the post-meeting statement. The minutes revealed, however, that the Fed officials had become more worried about inflation and had expressed a more hawkish stance than the statement suggested. First of all, we learned from the minutes that some central bankers opted for more aggressive tapering and a more flexible approach that would allow for adjustments in the face of high and persistent inflation: Some participants preferred a somewhat faster pace of reductions that would result in an earlier conclusion to net purchases (…). Some participants suggested that reducing the pace of net asset purchases by more than $15 billion each month could be warranted so that the Committee would be in a better position to make adjustments to the target range for the federal funds rate, particularly in light of inflation pressures. Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee's objectives (…) participants noted that the Committee would not hesitate to take appropriate actions to address inflation pressures that posed risks to its longer-run price stability and employment objectives. This is because the FOMC members’ concerns about inflation strengthened. As we can read in the minutes, They indicated that their uncertainty regarding this assessment had increased. Many participants pointed to considerations that might suggest that elevated inflation could prove more persistent. These participants noted that average inflation already exceeded 2 percent when measured on a multiyear basis and cited a number of factors—such as businesses' enhanced scope to pass on higher costs to their customers, the possibility that nominal wage growth had become more sensitive to labor market pressures, or accommodative financial conditions—that might result in inflation continuing at elevated levels. Last but not least, the Fed officials also made other hawkish comments. Some participants argued that labor force participation would be lower than before the pandemic because of structural reasons. It implies that we are closer to reaching the “full employment”, so monetary policy could be less accommodative. What’s more, “some participants highlighted the fact that price increases had become more widespread”, while a couple of them noted possible signs that inflation expectations had become less anchored. So, the Fed officials’ worries about inflation strengthened. Implications for Gold What does it all imply for the gold market? Well, both the reappointment of Powell as the Fed Chair and the latest FOMC minutes were interpreted as hawkish, which pushed gold prices down. The more upbeat prospects for monetary tightening are clearly negative for the yellow metal, as they boosted the bond yields (see the chart below). This is something I warned investors against earlier this month. I wrote in the Fundamental Gold Report on November 16 that “when something reaches the bottom, it should rebound later. And if real interest rates start to rally, then gold could struggle again.” This is exactly what happened. Later, in the article on November 18, I added that “I will feel more confident about the strength of the recent rally when gold rises above $1,900”. Well, gold failed to do this, so I’m not particularly bullish on gold right now. We could say that gold did it again: it played with the hearts of gold bulls but got lost in the game, as it didn’t resist the pressure. Yes, the new Omicron variant of coronavirus has been noted, and uncertainty about this strain could provide short-term support for the yellow metal. However, it seems that the prospects of monetary tightening and higher real interest rates will continue to put downward pressure on gold prices. I agree, the rally looked refreshing after months of disappointment. However, it seems that we have to wait longer, possibly for the start of the Fed’s increasing the interest rates, to see gold truly shining. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Article by Decrypt Media

More Public Debt Is Coming. Another Gold’s Rally Ahead?

Arkadiusz Sieron Arkadiusz Sieron 23.11.2021 15:13
  Democrats are not slowing down - the social spending bill follows the infrastructure package. Will gold benefit, or will it get into deep water? Will the American spending spree ever end? On Monday last week (November 15, 2021), President Biden signed a $1 trillion infrastructure package, and just a few days later, Biden’s social spending bill worth another $1.75 trillion passed the US House of Representatives. Apparently, $1 trillion was not enough! Apparently, we don’t already have too much money chasing too few goods. No, the economy needs even more money! Yes, I can almost hear the lament of American families: “we need more money, we already bought everything possible, we already own three cars and a lot of other useless crap, but we need more! Please, the almighty government, give us some bucks, let your funds revive our land”. Luckily, the gracious Uncle Sam listened to the prayers of its poor citizens. Given the above, one could think that the US economy is not already heavily indebted. Well, it’s the exact opposite. As the chart below shows, the American public debt is more than $27 trillion and 125% of GDP, but who cares except for a few boring economists? Of course, neither infrastructure nor spending bill will increase the fiscal deficits and overall indebtedness to a similar extent as the pandemic spending packages. These funds will be spread over years. Additionally, the fiscal deficit should narrow in FY 2022 as pandemic relief spending phases out (this is already happening, as the chart below shows), while the economic recovery combined with inflation tax bracket creep increases tax revenues. However, both of Biden’s bills will increase indebtedness, lowering the financial resilience of the US economy. What’s more, the overall debt is much larger than the public debt I focused on here. Other categories of debt are also rising. For instance, total household debt has jumped 6.2% in the third quarter of 2021 year-over-year, to a new record of $15.2 trillion.   Implications for Gold What does the fiscal offensive imply for the precious metal market? In the short run, not much. Fiscal hawks like me will complain, but gold is a tough metal that does not cry. Both of Biden’s pieces of legislation have been widely accepted, so their impact has already been incorporated into prices. Actually, the actual bills could be even seen as conservative – compared to Biden’s initial radical proposals. In the long run, fiscal exuberance should be supportive of gold prices. The ever-rising public debt should zombify the economy and erode the confidence in the US dollar, which could benefit the yellow metal. However, the empire collapses slowly, and there is still a long way before people cease to choose the greenback as their most beloved currency (there is simply no alternative!). So, it seems that, in the foreseeable future, gold’s path will still be dependent mainly on inflation worries and expectations of the Fed’s action. Most recently, gold prices have stabilized somewhat after the recent rally, as the chart below shows. Normal profit-taking took place, but gold found itself under pressure also because of the hawkish speech by Fed Governor Christopher Waller. He described inflation as a heavy snowfall that would stay on the ground for a while, rather than a one-inch dusting: Consider a snowfall, which we know will eventually melt. Snow is a transitory shock. If the snowfall is one inch and is expected to melt away the next day, it may be optimal to do nothing and wait for it to melt. But if the snowfall is 6 to 12 inches and expected to be on the ground for a week, you may want to act sooner and shovel the sidewalks and plow the streets. To me, the inflation data are starting to look a lot more like a big snowfall that will stay on the ground for a while, and that development is affecting my expectations of the level of monetary accommodation that is needed going forward. So, brace yourselves, a janitor is coming with a big shovel to clean the snow! Just imagine Powell with a long-eared cap, gloves, and galoshes giving a press conference! At least the central bankers would finally do something productive! Or… maybe shoveling is not coming! Although the Fed may turn a bit more hawkish if inflation stays with us for longer than expected previously, it should remain behind the curve, while the real interest rates should stay ultra-low. The December FOMC meeting will provide us with more clues, so stay tuned! 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Inflation Risk: Milton Friedman Would Buy Gold Right Now

Inflation Risk: Milton Friedman Would Buy Gold Right Now

Arkadiusz Sieron Arkadiusz Sieron 19.11.2021 16:50
Powell maintains that inflation is transitory, but the monetary theory of inflation suggests otherwise. So, elevated inflation could stay with us!, Some economists downplay the risk stemming from elevated inflation, saying that comparisons to the 1970s style stagflation appear unfounded. They say that labor unions are weaker and economies are less dependent on energy than in the past, which makes inflationary risks less likely to materialize. Isabel Schnabel, Board Member of the European Central Bank, even compared the current inflationary spike to a sneeze, i.e., “the economy’s reaction to dust being kicked up in the wake of the pandemic and the ensuing recovery”. Are those analysts right? Well, in a sense, they are. The economy is not in stagnation with little or no growth and a rising unemployment rate. On the contrary, the US labor market is continuously improving. It’s also true that both the bargaining power of workers and energy’s share in overall expenditure have diminished over the last fifty years. However, general inflation is neither caused by wages nor energy prices. Higher wages simply mean lower profits, so although employees can consume more, employers can spend less. If wages are set above the potential market rates, then unemployment emerges - not inflation. Similarly, higher energy prices affect the composition of spending, but not the overall monetary demand spent on goods and services. It works as follows: when the price of oil increases, people have to spend more money on oil (assuming the amount of consumed oil remains unchanged), which leaves less money available for other goods and services. So, the overall money spent on goods won’t change. As a consequence, the structure of relative prices will change, but widespread prices increases won’t happen. In other words, Milton Friedman’s dictum remains valid: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”. It’s quite a simple mechanism, even central bankers should be able to understand it: if the stock of goods remains unaltered while the stock of money increases, this, as Frank Shostak put it, “must lead to more money being spent on the unchanged stock of goods – an increase in the average price of goods” Let’s look at the chart below, which displays the annual growth rates in the broad money supply (M2, red line) and in the CPI (green line). We can notice two important things. First, in the 1970s, the pace of broad money supply growth was relatively high, as it reached double-digit values at some point. As a consequence, inflation accelerated, jumping above 10% for a while. In other words, stagflation was born. Since then, the rate of growth in the money supply never reached double-digit numbers on a prolonged basis, including the Great Recession, so high inflation never materialized. And then the pandemic came. In March 2020, the money supply growth rate crossed the 10% threshold and never came back. In February 2021, it reached its record height of 27.1%. The pace of growth in the M2 money aggregate has slowed down since then, dropping to a still relatively high rate of 13%. This is a rate that is almost double the pre-pandemic level (6.8% in February 2020) and the long-term average (7.1% for the 1960-2021 period ). So, actually, given the surge in the broad money supply and the monetary theory of inflation, rapidly rising prices shouldn’t be surprising at all. Second, there is a lag between the money supply growth and the increase in inflation rates. That’s why some analysts don’t believe in the quantity theory of money – there is no clear positive correlation between the two variables. This is indeed true – but only when you take both variables from the same periods. The correlation coefficient becomes significant and positive when you take inflation rates with a lag of 18-24 months behind the money supply. As John Greenwood and Steve Hanke explain in opinion for Wall Street Journal, According to monetarism, asset-price inflation should have occurred with a lag of one to nine months. Then, with a lag of six to 18 months, economic activity should have started to pick up. Lastly, after a lag of 12 to 24 months, generalized inflation should have set in. If this relationship is true, then inflation won’t go away anytime soon. After all, the money supply accelerated in March 2020 and peaked in February 2021, growing at more than four times the “optimal” rate that would keep inflation at the 2-percent target, according to Greenwood and Hanke. In line with the monetarist description, the CPI rates accelerated in March 2021, exactly one year after the surge in the money supply. So, if this lag is stable, the peak in inflation rates should happen in Q1 2022, and inflation should remain elevated until mid-2022 at least. What does it mean for the gold market? Well, if the theory of inflation outlined above is correct, elevated inflation will stay with us for several more months. Therefore, it’s not transitory, as the central bank tells us. Instead, inflation should remain high for a while, i.e., as long as the money supply growth won’t slow down and go back below 10% on a sustained basis. What’s more, the velocity of money, which plunged when the epidemic started, is likely to rise in the coming months, additionally boosting inflation. So, I would say that Milton Friedman would probably forecast more persistent inflation than Jerome Powell, allocating some of his funds into the yellow metal. Gold is, after all, considered to be an inflation hedge, and it should appreciate during the period of high and rising inflation. Although so far gold hasn’t benefited from higher inflation, this may change at some point. Actually, investors’ worries about inflation intensified in October, and gold started to show some reaction to the inflationary pressure. My bet is that the next year will be better for gold than 2021: the Fed’s tightening cycle will already be inaugurated, and thus traders will be able to focus on inflation, possibly shifting the allocation of some of their funds into gold as a safe-haven asset. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
Investors Expect High Inflation. Golden Inquisition Ahead?

Investors Expect High Inflation. Golden Inquisition Ahead?

Arkadiusz Sieron Arkadiusz Sieron 18.11.2021 15:33
  Inflation expectations reached a record high. Is gold preparing a counterattack to punish gold bears? In a , nobody expects the Spanish inquisition. In the current marketplace, everyone expects high inflation. As the chart below shows, the inflation expectations embedded in US Treasury yields have recently risen to the highest level since the series began in 2003. Houston, we have a problem, an unidentified object is flying to the moon! The 5-year breakeven inflation rate, which is the difference between the yields on ordinary Treasury bonds and inflation-protected Treasuries with the same maturity, soared to 2.76% on Monday. Meanwhile, the 10-year breakeven inflation rate surged to 3.17%. The numbers show the Treasury market’s measure of average CPI annual inflation rates over five and ten years, respectively. The chart is devastating for the Fed’s reputation if there’s anything left. You probably remember how the US central bank calmed investors, saying that we shouldn’t worry about inflation because inflation expectations are well-anchored. No, they don’t! Of course, the current inflation expectations oscillate around 3%, so they indicate that the bond market is anticipating a pullback in the inflation rate from its current level. Nevertheless, the average of 3% over ten or even just five years would be much above the Fed’s target of 2% and would be detrimental for savers in particular, and the US economy in general. I’ve already shown you market-based inflation expectations, which are relatively relaxed, but please take a look at the chart below, which displays the consumer expectations measured by the New York Fed’s surveys. As one can see, the median inflation expectations at the one-year horizon jumped 0.4 percentage point in October, to 5.7%. So much for the inflation expectations remaining under control!   Implications for Gold Surging inflation expectations are positive for the gold market. They should lower real interest rates and strengthen inflationary worries. This is because the destabilized inflation expectations may erode the confidence in the US dollar and boost inflation in the future. So, gold could gain as both an inflation hedge and a safe haven. And, importantly, the enlightened Fed is likely to remain well behind the curve in setting its monetary policy. This is even more probable if President Biden appoints Lael Brainard as the new Fed Chair. She is considered a dove, even more dovish than Powell, so if Brainard replaces him, investors should expect to see interest rates staying lower for longer. So, inflation expectations and actual inflation could go even higher. Hence, the dovish Fed combined with high inflation (and a slowdown in GDP growth) creates an excellent environment for gold to continue its rally. After all, the yellow metal has broken out after several months of consolidation (as the chart below shows), so the near future seems to be brighter. There are, of course, some threats for gold, as risks are always present. If the US dollar continues to strengthen and the real interests rebound, gold may struggle. But, after the recent change, the sentiment seems to remain positive. Anyway, I would like to return to the market-based inflation expectations and the famous Monty Python sketch. With an inflation rate of 3%, which is the number indicated by the bond market, the capital will halve in value in just 24 years! So, maybe it would be a too-far-reaching analogy, but Monty Python inquisitors wanted to use a rack to torture heretics by slowly increasing the strain on their limbs and causing excruciating physical pain (luckily, they were not the most effective inquisitors!). Meanwhile, inflation hits savers by slowly decreasing the purchasing power of money and causing significant financial pain. With the inflation rate at about 6%, hedging against inflation is a no-brainer. It’s a matter of financial self-defense! You don’t have to use gold for this purpose – but you definitely can. After several disappointing months, and the lack of gold’s reaction to inflation, something changed, and gold has managed to break out above $1,800. We will see how it goes on. I will feel more confident about the strength of the recent rally when gold rises above $1,900. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Biden Signs a Bill to Revive Infrastructure… and Gold!

Biden Signs a Bill to Revive Infrastructure… and Gold!

Arkadiusz Sieron Arkadiusz Sieron 16.11.2021 14:13
Gold rallied thanks to the changed narrative on inflation, and Biden’s infrastructure plan can only add to the inflationary pressure. Huge price moves ahead? I have a short quiz for you! What the government should do to decrease inflation that reached the highest level in 30 years? A) Decrease its expenditure to make room for the Fed to hike the federal funds rate. B) Press the US central bank to tighten its monetary policy. C) Deregulate the markets and lower taxes to boost the supply side of the economy. D) Introduce a huge infrastructure plan that will multiply spending on energy, raw materials, and inputs in general. Please guess which option the US government chose. Yes, the worst possible. Exam failed! At the beginning of November, Congress passed a bipartisan infrastructure bill. And President Biden signed it on Monday (November 15, 2021). To be clear, I’m not claiming that America doesn’t need any investment in infrastructure. Perhaps it needs it, and perhaps it’s a better idea than social spending on unemployment benefits that discourage work. I don’t want to argue about the adequacy of large government infrastructure projects, although government spending generally fails to stimulate genuine economic growth and governments rarely outperform the private sector in effectiveness. My point is that $1.2 trillion infrastructure spending is coming at the worst possible moment. The US economy is facing supply shortages and high inflation caused by surging demand, which choked the ports and factories. In short, too much money is chasing too few goods, and policymakers decided to add additional money into the already blocked supply chains! I have no words of admiration for the intellectual abilities of the members of Congress and the White House! Indeed, the spending plan does not have to be inflationary if financed purely by taxes and borrowing. However, the Fed will likely monetize at least part of the newly issued federal debt, and you know, to build or repair infrastructure, workers are needed, and steel, and concrete, and energy. The infrastructure spending, thus, will add pressure to the ongoing energy crisis and high producer price inflation, not to mention the shortage of workers. Implications for Gold What does the passing of the infrastructure bill imply for the gold market? Well, it should be supportive of the yellow metal. First, it will increase the fiscal deficits by additional billions of dollars (the Congressional Budget Office estimates that the bill will enlarge the deficits by $256 billion). Second, government spending will add to the inflationary pressure, which gold should also welcome. After all, gold recalled last week that it is a hedge against high and accelerating inflation. As the chart below shows, gold not only jumped above the key level of $1,800, but it even managed to cross $1,850 on renewed inflation worries. The infrastructure bill was probably discounted by the traders, so its impact on the precious metals market should be limited. However, generally, all news that could intensify inflationary fears should be supportive of the yellow metal. You see, the narrative has changed. So far, the thinking was that higher inflation implies faster tapering and interest rates hikes and, thus, lower gold prices. This is why gold was waiting on the sidelines for the past several months despite high inflation. Investors also believed that inflation would be transitory. However, the recent CPI report forced the markets to embrace the fact that inflation could be more persistent. What’s more, tapering of quantitative easing started, which erased some downward pressure on gold. Moreover, despite the slowdown in the pace of asset purchases, the Fed will maintain its accommodative stance and stay behind the curve. So, at the moment, the reasoning is that high inflation implies elevated fears, which is good for gold. I have always believed that gold’s more bullish reaction to accelerating inflation was a matter of time. It’s possible that this time has just come. Having said that, investors should remember that market narratives can change quickly. At some point, the Fed will probably step in and send some hawkish signals, which could calm investors and pull some of them out of the gold market. My second concern is that gold could have reacted not to accelerating inflation, but rather to the plunge in the real interest rates. As the chart below shows, the yields on 10-year TIPS have dropped to -1.17, a level very close to the August bottom. When something reaches the bottom, it should rebound later. And if real interest rates start to rally, then gold could struggle again. However, I’ll stop complaining now and allow the bulls to celebrate the long-awaited breakout. It’s an interesting development compared to the last months, that’s for sure! 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Will Evergrande Make Gold Grand?

Will Evergrande Make Gold Grand?

Arkadiusz Sieron Arkadiusz Sieron 12.11.2021 18:57
  Evergrande’s debt issues are a symptom of China’s deep structural problems. If the crisis spills over wider, gold may benefit, but we are still far from such a scenario. Beijing, we have a problem! Evergrande, one of China’s largest real estate developers and biggest companies in the world, is struggling to meet the interest payments on its debts. As the company has more than $300 billion worth of liabilities, its recent liquidity problems have sparked fears in the financial markets. They also triggered a wave of questions: will Evergrande become a Chinese Lehman Brothers? Is the Chinese economy going to collapse or stagnate? Will Evergrande make gold grand? The answer to the first question is: no, the possible default of Evergrande likely won’t cause a global contagion in the same way as Lehman Brothers did. Why? First of all, Lehman Brothers collapsed because of the run in the repo market and the following liquidity crisis. As the company was exposed to subprime assets, investors lost confidence and the bank lost its access to cheap credit. Lehman Brothers tried to sell its assets, which plunged the prices of a wide range of financial assets, putting other institutions into trouble. Unlike Lehman Brothers, Evergrande is not an investment bank but a real estate developer. It doesn’t have so many financial assets, and it’s not a key player in the repo market. The exposure of important global financial institutions to Evergrande is much smaller. What’s more, we haven’t seen a credit freeze yet, nor an endless wave of selling across almost all asset classes, which took place during the global financial crisis of 2007-2009. Given that the Lehman Brothers’ bankruptcy was ultimately positive for gold (although the price of the yellow metal declined initially during the phase of wide sell-offs), the fact that Evergrande probably doesn’t pose similar risks to the global economy could be disappointing for gold bulls. However, gold bulls could warmly welcome my answer to the second question: the case of Evergrande reveals deep and structural problems of China’s economy, namely its heavy reliance on debt and the real estate sector. As the chart below shows, the debt of the private non-financial sector has increased from about 145% of GDP after the Great Recession to 220% in the first quarter of 2021. So, China has experienced a massive increase in debt since the global financial crisis, reaching levels much higher than in the case of other economies. The rise in indebtedness allowed China to continue its economic expansion, but questions arose about the quality and sustainability of that growth. As Daniel Lacalle points out, The problem with Evergrande is that it is not an anecdote, but a symptom of a model based on leveraged growth and seeking to inflate GDP at any cost with ghost cities, unused infrastructure, and wild construction. Indeed, the levels and rates of growth of China’s private debt are similar to the countries that have experienced spectacular financial crises, such as Japan, Thailand, or Spain. But the significance of China’s real estate sector is much higher. According to the paper by Rogoff and Yang, the real-estate sector accounts for nearly 30% of China’s GDP. On the other hand, China has a relatively high savings rate, while debt is mostly of domestic nature. China’s financial ties to the world are not very strong, which limits the contagion risks. What is more, the Chinese government has acknowledged the problem of excessive debts in the private sector and started a few years ago making some efforts to curb it. The problems of Evergrande can be actually seen as the results of these deleveraging attempts. Therefore, I’m not sure whether China’s economy will collapse anytime soon, but its pace of growth is likely to slow down further. The growth model based on debt and investments (mainly in real estate) has clearly reached its limit. In other words, the property boom must end. Rogoff and Yang estimate that “a 20% fall in real estate activity could lead to a 5-10% fall in GDP”. Such growth slowdown and inevitable adjustments in China’s economy will have significant repercussions on the global economy, as – according to some research – China’s construction sector is now the most important sector for the global economy in terms of its impact on global GDP. In particular, the prices of commodities used in the construction sector may decline and the countries that export to China may suffer. Given that China was the engine of global growth for years, it will also slow down, and, with lower production, it’s possible that inflation will be higher. Finally, what do the problems of China’s real estate sector imply for the gold market? Well, in the short term, not so much. Gold is likely to remain under downward pressure resulting from the prospects of the Fed’s tightening cycle. However, if Evergrande’s problems spill over, affecting China’s economy or (a bit later) even the global economy, the situation may change. Other Chinese developers (such as Fantasia or Sinic) also have problems with debt payments, as investors are not willing to finance new issues of bonds. In such a scenario, the demand for gold as a safe-haven asset might increase, although investors have to remember that the initial rush could be into cash (the US dollar) rather than gold. Unless China’s problems pose a serious threat to the American economy, the appreciation of the greenback will likely counterweigh the gains from safe-haven inflows into gold. So far, financial markets have remained relatively undisturbed by the Evergrande case. Nevertheless, I will closely monitor any upcoming developments in China’s economy and their possible effects on the gold market. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
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Inflation to the Moon - Gold Wears a Space Suit!

Arkadiusz Sieron Arkadiusz Sieron 11.11.2021 16:06
  Inflation rears its ugly head, surging at the fastest pace since 1990. The yellow metal has finally reacted as befits an inflation hedge: went up. Do you know what ambivalence is? It is a state of having two opposing feelings at the same time –this is exactly how I feel now. Why? Well, the latest BLS report on inflation shows that consumer inflation surged in October, which is something I hate because it lowers the purchasing power of money, deteriorating the financial situation of most people, especially the poorest and the least educated who don’t know how to protect against rising prices. On the other hand, I feel satisfaction, as it turned out that I was right in claiming that high inflation would be more persistent than the pundits claimed. After the September report on inflation, I wrote: “I’m afraid that consumer inflation could increase even further in the near future”. Sieron vs. Powell: 1:0! Indeed, the CPI rose 0.9% last month after rising 0.4% in September. The core CPI, which excludes food and energy prices, accelerated to 0.6% in October from 0.1% in the preceding month. And, as the chart below shows, the overall CPI annual rate accelerated from 5.4% in September to 6.2% in October, while the core CPI annual rate jumped from 4% to 4.6%. This surge (and a new peak) is a final blow to the Fed’s fairy tale about transitory inflation. As one can see in the chart above, the CPI rate has stayed above the Fed’s target since March 2021, and it won’t decline to 2% anytime soon. This contradicts all definitions of transitoriness I know. What’s more, the October surge in inflation was not only above the expectations – it was also the biggest jump since November 1990, as the chart below shows. Unfortunately for Americans, it might not be the last word of inflation. This is because over 80% of CPI subcomponents were above the Fed’s target of 2%, which clearly indicates that high inflation is not caused merely by the reopening of the economy but also by the broad-based factors such as the surge in the money supply.   Implications for Gold Ladies and gentlemen, gold finally reacted to surging inflation! As the chart below shows, the price of gold (Comex futures) spiked from below $1,830 to above $1,860 after the BLS report on CPI. Why did gold finally notice inflation and react as a true inflation hedge? Well, it seems that the narrative changed. Until recently, investors believed the Fed that inflation would be transitory. Reality, however, has disproved this story. Another factor I would like to mention is the FOMC’s recent announcement of tapering of its quantitative easing. That event removed some downward pressure from the gold market. By the way, this is something I also correctly predicted in the Fundamental Gold Report that commented on September inflation report: “it seems that until the Fed tapers its quantitative easing, gold will remain under downward pressure. Nonetheless, when it finally happens, better times may come for gold.” Indeed, yesterday’s rally suggests that gold recalled its function as a hedge against inflation. Until today, I was cautious in announcing the breakout in the gold market, as the yellow metal jumped above $1,800 only recently. However, the fact that gold managed not only to stay above $1,800 but also to continue its march upward (in tandem with the US dollar!) suggests that there is bullish momentum right now. Having said that, investors should remember about the threat of a more hawkish Fed. Higher inflation could support the monetary hawks within the FOMC and prompt the US central bank to raise interest rates sooner rather than later. The prospects of a tightening cycle could weigh on gold. However, as long as investors focus stronger on inflation than on tightening of monetary policy, and as long as the real interest rates decrease, or at do not increase, gold can go up. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
How Strange! Gold Rises on Strong Payrolls!

How Strange! Gold Rises on Strong Payrolls!

Arkadiusz Sieron Arkadiusz Sieron 09.11.2021 15:20
US economy added 531,000 jobs in October, surpassing expectations. Gold reacted… in a bullish way, and jumped above $1,800! The October nonfarm payrolls came surprisingly strong. As the chart below shows, the US labor market added 531,000 jobs last month, much above the expectations (MarketWatch’s analysts forecasted 450,000 added jobs). So, it’s a nice change from the last two disappointing reports. What’s more, the August and September numbers were significantly revised up – by 235,000 combined. Let’s keep in mind that we also have the additions of 1,091,000 in July and 366,000 in August (after an upward revision). Additionally, the unemployment rate declined from 4.8% to 4.6%, as the chart above shows. It’s a positive surprise, as economists expected a drop to 4.7%. In absolute terms, the number of unemployed people fell by 255,000 - to 7.4 million. It’s a much lower level compared to the recessionary peak (23.1 million), however, it’s still significantly higher than before the pandemic (5.7 million and the unemployment rate of 3.5%). Implications for Gold What does the recent employment report imply for the precious market? Well, gold surprised observers and rallied on Friday despite strong nonfarm payrolls. As the chart below shows, the London P.M. Fix surpassed the key level of $1,800. To show gold’s reaction more clearly, let’s take a look at the chart below, which shows that the price of gold futures initially declined after the October Employment Situation Report release. Only after a while, it rebounded and rallied to about $1,820. It’s a surprising behavior, as gold usually reacted negatively to strong economic data. Until now, gold liked weak employment reports as they increased the chances of a dovish Fed that would continue its easy monetary policy. Now, something has changed. But what? Well, some analysts would say that nothing has changed at all. Instead, they would tell us that the latest employment report is not as strong as it seems. In particular, the labor force participation rate was unmoved at 61.6% in October and has remained within a narrow range of 61.4% to 61.7% since June 2020, as the chart below shows. The lack of any improvement in the labor force participation rate could be interpreted as a lack of full employment and used by the Fed as an excuse to leave interest rates unchanged for a long time. I’m not convinced by this explanation. “Full employment” does not mean that all people are working, but all people who want to work are working. And, as the chart above shows, the fact that after the Great Recession the labor participation rate didn’t move back to the pre-crisis level didn’t prevent the Fed from hiking interest rates in 2015-2019. There is also another possibility. It might be the case that investors are now focusing on inflation. The employment report showed that the average hourly earnings have increased by 4.9% over the past twelve months, raising some concerns about wage inflation and general price pressure in the economy. Remember: context is crucial. If the new narrative is more about high inflation, good news may be positive for gold if they also indicate strong inflationary pressure. Although I like this explanation, it’s not free from shortcomings. You see, stronger inflation concerns should increase inflation premium and bond yields. However, the opposite is true: the real interest rates declined last week (see the chart below), enabling gold to catch its breath. After all, the markets are expecting a more dovish Fed than before the announcement of tapering. This is a fundamentally positive development for the gold market. Having said that, it’s too early to declare the start of the breakout. If inflation stays high, the US central bank could have no choice but to hike interest rates next year. Also, although the recent jump despite strong payrolls is encouraging, gold has yet to prove that it can stay above $1,800. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Why Isn’t Gold Rallying Along With Inflation?

Why Isn’t Gold Rallying Along With Inflation?

Arkadiusz Sieron Arkadiusz Sieron 05.11.2021 16:20
  Inflation is high and doesn’t seem to be going away anytime soon. However, gold is not rising. The question is – what does the Fed have to do with it? Inflation is not merely transitory, and that’s a fact. Why then isn’t gold rallying? Isn’t it an inflation-hedge? Well, it is - but gold is a lazy employee. It shows up at work only when inflation is high and accelerating; otherwise, it refuses to get its golden butt up and do its job. All right, fine, but inflation is relatively high! So, there have to be other reasons why gold remains stuck around $1,800. First of all, central banks are shifting their monetary policy. Global easing has ended, global tightening is coming! Actually, several central banks have already tightened their stance. For example, among developed countries, New Zealand, Norway, and South Korea have raised interest rates. Brazil, the Czech Republic, Hungary, Mexico, Poland, Romania, and Russia are in the club of monetary policy hawks as well. Even the bank of England could hike its policy rate this year, while the Fed has only announced tapering of its asset purchases. So, although central banks will likely maintain their dovish bias and real interest rates will stay negative, the era of epidemic ultra-loose monetary policy is coming to an end. We all know that neither the interest rates nor the central banks’ balance sheets will return to the pre-pandemic level, but the direction is clear: central banks are starting tightening cycles, no matter how gentle and gradual they will be. This means that monetary policy is no longer supportive of gold. The same applies to fiscal policy. It remains historically lax despite fiscal stimulus being pulled back. Even though Uncle Sam ran a fiscal deficit of $2.8 trillion in fiscal year 2021 - almost three times that of fiscal year 2019 ($0.98 trillion) - it was 12% lower than in fiscal year 2020 ($3.1 trillion). This implies that the fiscal policy is also tightening (despite the fact that it remains extravagantly accommodative), which is quite a headwind for gold. Investors should always look at directional changes, not at absolute levels. What’s more, we are still far from stagflation. We still experience both high inflation and fast GDP growth, as well as an improving labor market. As a reminder, the unemployment rate declined from 5.2% in August to 4.8% in September. The fact that the labor market continues to hold up relatively well is the reason why the so-called Misery Index, i.e., the sum of inflation and unemployment rates, remains moderate despite high inflation. It amounted to 10.19 in September, much below the range of 12.5-20 seen during the Great Inflation of the 1970s (see the chart below). So, the dominant narrative is about both inflation and growth. When people got vaccines, markets ceased to worry about coronavirus and started to expect a strong recovery. Commodity and equity prices are rising, as well as real interest rates. These market trends reflect expectations of more growth than inflation – expectations that hurt gold and made it get stuck around $1,800. Having said that, the case for gold is not lost. Gold bulls should be patient. The growth is going to slow down, and when inflation persists for several months, the pace of real growth will decline even further, shifting the market narrative to worrying about inflation’s negative effects and stagflation. Gold should shine then. Wait, when? Soon. The Fed’s tightening cycle could be a turning point. The US central bank has already announced tapering of quantitative easing, which could erase some downward pressure on gold resulting from the anticipation of this event. Additionally, please remember that every notable market correction coincided with the end of QE, and every recession coincided with the Fed’s tightening cycle. Moreover, don’t forget that gold bottomed in December 2015, just when the Fed started hiking the federal funds rate for the first time since the Great Recession, as the chart below shows. However, when it comes to tapering, the situation is more complicated. The previous tapering was announced in December 2013, started in January 2014, and ended in October 2014. As one can see in the chart above, the price of gold initially increased, but it remained in its downward trend until December 2015 when the Fed started hiking interest rates. Hence, if history is any guide, there are high odds that gold may struggle further for a while before starting to rally next year, which could happen even as soon as June 2022, when the markets expect the first hike in interest rates. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
Huge News! The Fed’s Tapering Is Finally Here!

Huge News! The Fed’s Tapering Is Finally Here!

Arkadiusz Sieron Arkadiusz Sieron 04.11.2021 15:04
The Fed has announced tapering of its quantitative easing! Preparing for the worst, gold declined even before the release - will it get to its feet? . Ladies and gentlemen, please welcome to the stage the one and only tapering of the Fed’s quantitative easing! Yesterday was that day – the day when the FOMC announced a slowdown in the pace of its asset purchases: In light of the substantial further progress the economy has made toward the Committee's goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities. Beginning later this month, the Committee will increase its holdings of Treasury securities by at least $70 billion per month and of agency mortgage‑backed securities by at least $35 billion per month. It’s all but a bombshell, as this move was widely expected by the markets. However, what can be seen as surprising is the Fed’s decision to scale back its asset purchases already in November instead of waiting with the actual start until December. Hawks might be pleased – contrary to doves and gold bulls. How is the tapering going to work? The Fed will reduce the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities each month: Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. So, instead of buying Treasuries worth $80 billion and agency mortgage‑backed securities worth $40 billion (at least), the Fed will purchase $70 billion of Treasuries later this month and $35 billion of MBS, respectively. Then, it will buy $60 billion of Treasuries and $30 billion of MBS in December, $50 billion of Treasuries and $25 billion of MBS in January, and so on until the last round of purchases in May 2022. This means that the quantitative easing will be completed by mid-year if nothing changes along the way. The announcement of the tapering was undoubtedly the biggest event; however, I would like to point out one more modification. The sentence “inflation is elevated, largely reflecting transitory factors” was replaced in the newest statement with “inflation is elevated, largely reflecting factors that are expected to be transitory”. It’s not a big alteration, but “expected to be” is weaker than simply “is”. This means that the Fed’s confidence in its own transitory narrative has diminished, which implies that inflation might be more persistent than initially thought, which could support gold prices more decisively at some point in the future. The Fed also explained why prices are rising: “Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors”. Unsurprisingly, the Fed didn’t mention the surge in the money supply and the unconventional monetary and fiscal policies, just “imbalances”! Implications for Gold What does the Fed’s announcement of a slowdown in asset purchases imply for the gold market? Well, the yellow metal showed little reaction to the FOMC statement, as tapering was in line with market expectations. Actually, gold prices fell to three-week lows in the morning — right after the publication of positive economic data but before the statement. However, gold started to rebound after the FOMC announcement, as the chart below shows. Why? The likely reason is that both the statement and Powell’s press conference were less hawkish than expected. After all, the Fed did very little to signal interest rate hikes. What’s more, Powell expressed some dovish remarks. For instance, he said that it was a bad time to hike interest rates: “it will be premature to raise rates today” (…) We don’t think it is a good time to raise interest rates because we want to see the labor market heal more.” The bottom line is that gold’s reaction to the FOMC statement was muted, as tapering was apparently already priced in. The lack of bearish reaction is a positive sign. However, gold’s struggle could continue for a while, perhaps until the Fed starts its tightening cycle. For now, all eyes are on Friday’s non-farm payrolls. Stay tuned! 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, PhDSunshine Profits: Effective Investment through Diligence & Care
Here We Go Again - Gold Simply Can’t Stand $1,800!

Here We Go Again - Gold Simply Can’t Stand $1,800!

Arkadiusz Sieron Arkadiusz Sieron 02.11.2021 15:05
  The yellow metal couldn’t face the downward pressure and declined abruptly on Friday. What happened, and why did it fail? Friday was a brutal time for gold. The price of the yellow metal dropped sharply from around $1,795 to $1,775 in the early morning hours in the US. Am I surprised? Not at all. In Thursday’s edition of the Fundamental Gold Report, I wrote that “gold may struggle until the Fed’s tightening cycle starts. You have been warned!”, and, as if on cue, gold wasn’t able to maintain its position around $1,800 and declined. Actually, gold prices have been testing and failing to hold this key psychological level for the last three weeks. What exactly happened on Friday? Well, the Bureau of Economic Analysis published the report on personal income and outlays in September 2021. The publication shows that U.S. nominal consumer spending increased 0.6%, while the disposable personal income declined 1.3%, reflecting a decrease in government social benefits. Additionally, the annual rate of change in personal consumption expenditures price index accelerated from 4.2% in August to 4.4% in September (see the chart below), the highest pace since January 1991. Wait. Inflation rose, but gold prices declined? Exactly. Inflation is fundamentally positive for gold in the long run, but so far – as I explained last week – “inflationary worries have been counterweighted by the expectations of the Fed’s tightening cycle”. The relationship is simple: higher inflation translates into higher expectations of a more hawkish Fed. The odds of an interest rate hike in June 2022 increased from 23.1% - recorded at the end of September - to 61.6% on October 22 and 65.7% on October 29, 2021. As a result, the bond yields increased, while the greenback strengthened. There is also another possible driver of rising interest rates and an appreciating US dollar. CPI inflation in the euro area accelerated to 4.1% in October from 3.4% in September, reaching the highest value since July 2008. However, the ECB kept its monetary policy unchanged last week despite quickly rising prices. Moreover, it’s not signaling any tightening of its stance, maintaining that high inflation is transitory even though Christine Lagarde acknowledged that the decline in inflation would take longer than the central bank had initially expected. The point here is that the ECB remains an outlier among central banks, which either have already tightened or signaled tightening of their monetary policy. This means that the US dollar is likely to appreciate against the euro, which should be another headwind for gold. Having said that, this scenario will occur if the markets believe in a dovish stance of the EBC. The rising yields on German bonds indicate that the markets don’t entirely trust Lagarde’s rhetoric and expect a more hawkish stance of the ECB, which would be fortunate for gold.   Implications for Gold What does higher US inflation imply for the gold market? Well, not so much in the short run. Even though I’ve seen some signs of a bullish revival in the gold market, the bulls remain too weak to challenge the $1,800 level. That’s too much, man! Luckily, better times are coming for gold. Have you seen the advance estimates of the durable goods orders (0.4% decline in September) or of the GDP in the third quarter of this year? According to the BEA, real GDP increased at an annual rate of 2.0% (annualized quarterly growth), much below the 6.7% reported in Q2 and much below the expectations of 2.8% growth. When it comes to the annual percentage growth year-over-year, real GDP rose 4.9% compared to 12.2% in Q2, as the chart below shows. So, the pace of growth remains historically fast, but it’s decelerating quickly. Given that the economy has already reopened and energy and transportation crises are hurting growth (not to mention inflation wreaking havoc), we should expect a further slowdown on the way. And this brings us closer to… yes, you guessed it, stagflation. To be clear: we are still far from stagnation, but the economic slowdown after a spectacular post-pandemic recovery is already unfolding. When we add it to high inflation, we should get an environment supportive of gold prices. However, supportive factors won’t be able to fully operate until the Fed starts hiking interest rates and gold prices bottom out. Sometimes one needs to hit rock bottom to succeed later; perhaps that’s also the case with gold. Time will tell. 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, PhDSunshine Profits: Effective Investment through Diligence & Care
The Bank of Canada Ends QE, Plunging Gold Prices in CAD

The Bank of Canada Ends QE, Plunging Gold Prices in CAD

Arkadiusz Sieron Arkadiusz Sieron 28.10.2021 16:25
So, QE ended (so far in Canada, but the Fed will follow suit) and the termination plunged gold prices in Canadian dollars. Will this repeat globally? Finally! Yesterday (October 27, 2021), one central bank ended its quantitative easing program after gradually reducing the pace of asset purchases earlier this year. Don’t panic though - it wasn’t the Fed, nor the ECB, nor the Bank of Japan. It was the Bank of Canada. As we can read in the monetary policy statement: In light of the progress made in the economic recovery, the Governing Council has decided to end quantitative easing and keep its overall holdings of Government of Canada bonds roughly constant. Of course, the central bank didn’t say a word about a reduction of the size of its balance sheet. This is how the dovish bias works: central banks never return to the pre-crisis levels of interest rates or balance sheet. Anyway, I would like to focus on the fact that the central bank of Canada admitted that it underestimated the persistence of inflation, which could remain elevated next year: The recent increase in CPI inflation was anticipated in July, but the main forces pushing up prices – higher energy prices and pandemic-related supply bottlenecks – now appear to be stronger and more persistent than expected. More persistent and higher inflation implies sooner monetary policy tightening. The BoC signaled that it could hike its main policy interest rate in mid-2022: We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In the Bank’s projection, this happens sometime in the middle quarters of 2022. The direct consequences of the Bank of Canada ending QE should be limited, as the BoC’s actions are not too meaningful for the global financial markets. However, yesterday’s decision is emblematic of the current shift among central banks from monetary easing into monetary tightening. Investors should be thus prepared for more persistent inflation and for a hawkish response of central banks. Interestingly, while the BoC has just completed its asset purchases program, the Fed is only going to start tapering its own quantitative easing program. It means that the US central bank is tardy and behind the curve (especially that inflation in Canada is lower than across the border). So, its reaction will have to be stronger in the future. The market expects the first hike in the federal funds rate to happen in June 2022, so also in the middle quarters of 2022, despite the Fed’s one-year lag behind the Bank of Canada. Gold may struggle until the Fed’s tightening cycle starts. You have been warned! Implications for Gold What does the end of Canadian quantitative easing imply for the gold market? Well, the direct impact on gold prices denominated in greenbacks should be minimal. However, the decision to stop QE exerted a huge impact on the price of gold denominated in the Canadian dollar. As the chart below shows, the price plunged yesterday from about 2228 CAD to C$2204 CAD within minutes. This drop may be a harbinger of what may happen in the international gold market when the Fed tightens its own monetary policy. Of course, the announcement of tapering at the November FOMC meeting is widely expected. However, please remember that the message of tapering could be accompanied by other hawkish signals as well. So, although gold has been moving upward recently (see the chart below), its struggles could continue for a while. The silver lining is that the drop in the gold price in CAD – although abrupt – wasn’t too deep overall and reversed quickly. To be clear, a 1% drop is relatively large, but it’s not a total disaster, especially given the prominence of the event. It seems that inflation worries currently provide support for gold prices. 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
Gold Bearish Outlook: Everything Goes According to Plan

Gold Bearish Outlook: Everything Goes According to Plan

Arkadiusz Sieron Arkadiusz Sieron 27.10.2021 14:35
We might see a plunge in gold prices quite soon. History repeats itself to a huge degree at the moment – let’s see what it has to offer. Today’s technical analysis will be very similar to what I provided to you yesterday because the markets pretty much moved exactly as I had expected. As you may recall, I wrote about the analogy between now and early August in the following way (I’m putting the key part in bold): The situation now appears to be the same as it was at the beginning of August, where the bottom also took several days to form, but when the USD Index finally moved higher once again, gold plunged. To be precise, back then, the bottom formed over 5 trading days, and yesterday was the fifth trading day of the current bottom. On the sixth day – back then – the USDX did very little and gold declined modestly, and it was the seventh day when the action really started. And… the short-term decline was over on the very next day. It was not easy to catch this decline if one wanted to wait for a big confirmation that it was indeed taking place. It seems that the same – patient – approach is justified in the current situation. The RSI indicator (upper part of the chart) continues to confirm this similarity. Yesterday, the USD Index ended the session 0.13 higher, so – just as in early August – it moved very little. Gold declined modestly back then, and, well, it moved lower by $13.40 yesterday, so it seems that it fits well. Gold is down by $6 in today’s pre-market trading (at the moment of writing these words), so it seems that history might repeat itself to a very big degree. If it repeated itself to the letter, we would have a $100+ decline in gold this week. But since history rhymes more than it repeats, I think it’s more realistic to simply expect gold to fall substantially soon, without giving the decline just 2 days to materialize. The situation now appears to be the same as it was at the beginning of August, where the bottom also took several days to form, but when the USD Index finally moved higher once again, gold plunged. To be precise, back then, the bottom formed over 5 trading days, and yesterday was the fifth trading day of the current bottom. On the sixth day – back then – the USDX did very little and gold declined modestly, and it was the seventh day when the action really started. And… the short-term decline was over on the very next day. It was not easy to catch this decline if one wanted to wait for a big confirmation that it was indeed taking place. It seems that the same – patient – approach is justified in the current situation. The RSI indicator (upper part of the chart) continues to confirm this similarity. Yesterday, the USD Index ended the session 0.13 higher, so – just as in early August – it moved very little. Gold declined modestly back then, and, well, it moved lower by $13.40 yesterday, so it seems that it fits well. Gold is down by $6 in today’s pre-market trading (at the moment of writing these words), so it seems that history might repeat itself to a very big degree. If it repeated itself to the letter, we would have a $100+ decline in gold this week. But since history rhymes more than it repeats, I think it’s more realistic to simply expect gold to fall substantially soon, without giving the decline just 2 days to materialize. To explain, the green line above tracks the GDXJ ETF from the beginning of 2013 to the end of 2015. If you analyze the left side of the chart, you can see that when Fed Chairman Ben Bernanke hinted at tapering on May 22, 2013, the GDXJ ETF declined by 32% from May 22 until the taper began on Dec. 18. Moreover, the onslaught didn’t end there. Once the taper officially began, the GDXJ ETF enjoyed a relief rally (similar to what we’re witnessing now) as long-term interest rates declined, and the PMs assumed that the worst was in the rearview. All in all, the technical picture for the precious metals sector looks bearish, even though the recent short-term corrective upswing might make one think otherwise. Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today. Przemyslaw Radomski, CFA Founder, Editor-in-chief Sunshine Profits: Effective Investment through Diligence & Care * * * * * All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
Powell Once Again Proved to Be Gold’s Joy Destroyer

Powell Once Again Proved to Be Gold’s Joy Destroyer

Arkadiusz Sieron Arkadiusz Sieron 27.10.2021 14:12
Inflation worries have intensified, gold started to rally on Friday… and then Powell came, ruining the party and killing the bullish vibe. Friday (October 22, 2021) started wonderfully for the yellow metal. Gold was appreciating since early morning, and it even jumped above $1,810 around 10-11 A.M. New York Time. As the chart below shows, the London P.M. Fix was above $1,800, the key psychological level under which gold has been stuck recently. Unfortunately, the joy was short-lived. Gold dived again below $1,800 later on Friday. What was the reason? Well, it might be just inherent weakness and inability to overcome its resistance level. But it seems that Jerome Powell contributed to the drop, if not triggered it. He participated in an online conference hosted by the South African Reserve Bank on Friday, making remarks that were considered hawkish. What did Powell say? Well, he reiterated that the Fed is on track to start tapering its asset purchases this year and that the whole process is expected to end by mid-2022. However, Powell downplayed the inflation threat. Even though he acknowledged that risks were growing and that “elevated inflation [is] likely to last longer than previously expected and well into next year”, he also said that supply-chain issues would eventually be resolved and inflation would fall back to the Fed’s target of 2%. As a consequence of Powell’s remarks, the price of gold declined roughly $30, from almost $1,815 to $1,785. The yellow metal rebounded slightly later, but it was unable to return to $1,800. Implications for Gold What is happening in the gold market right now? Well, it seems that inflation worries have intensified recently, and gold started to grow (a bit timidly, but still) on those fears. Unfortunately for gold bulls, Powell threw cold water on gold’s rally on Friday. After all, the upcoming tapering of quantitative easing, as well as the cycle of interest rate hikes, could continue to create downward pressure on gold. On the other hand, Powell also made some dovish comments, as he emphasized that the Fed was going to taper its asset purchases soon, but it wouldn’t raise the federal funds rate until the maximum employment was reached. He said: “I do think it’s time to taper; I don’t think it’s time to raise rates”. What is even more important, Mr. Market has finally awakened from the dream about a world without inflation. In other words, investors started to question the Fed’s narrative about the ‘merely transitory’ price pressure. Given that the economic growth is going to slow down, the risk of stagflation is growing, which should support gold. Please take a look at the chart below. As one can see, the market-based inflation expectations rose significantly last week. The inflation breakeven rates in the 10-year bonds increased from 2.54% to 2.64%, while in 5-year bonds they jumped from 2.71% to 2.94%, the highest level since March 2005. It means that the markets expect more persistent inflation than the Fed and bet that the US central bank will stay behind the curve. We can call it “the revenge of the supply”. Policymakers have been focused for years on the demand side of the economy, just to discover that the supply side matters too. Right now, companies all over the world are facing supply-chain bottlenecks, shortage of workers, energy crisis, transportation crisis, and semiconductors squeeze. Thus, many of them are now passing higher costs on (in the form of higher prices) to consumers, indicating even more increases down the road. The bottom line is that rising inflationary expectations are fundamentally positive for gold prices. So far, inflationary worries have been counterweighted by the expectations of the Fed’s tightening cycle and economic recovery. However, the growth is going to slow down, while the date of the first hike is approaching quickly. Therefore, gold’s outlook should improve in the coming months. 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
Will Pandexit Support Gold?

Will Pandexit Support Gold?

Arkadiusz Sieron Arkadiusz Sieron 25.10.2021 00:14
Pandemic will cease to be a problem at some point. It will leave the world with other problems though, and they could be supportive of gold. Maybe it’s not the best timing, given the spread of the Delta variant of the coronavirus, but let’s be optimistic and assume that we will soon leave the epidemic behind us. It goes without saying that the pandexit, or the exit of the Covid-19 pandemic from the world, is believed to be positive for the global economy. However, even if the pandemic ends, it will leave the world with many risks. As Agustín Carstens, Bank for International Settlements General Manager, has recently noted, “policymakers still face daunting challenges as we exit the pandemic”. The first threat is, of course, that the pandemic won’t end anytime soon, as new variants could emerge, entailing further lockdowns, as well as monetary and fiscal stimulus. I cannot exclude it, but my bet is that the economic impact of new strains will be smaller, as people will be better adapted to the epidemic, while sanitary restrictions will be softer because people will be vaccinated and fed up with lockdowns. The second risk is that inflation could rise further or turn out to be more persistent than expected. I analyzed this threat thoroughly earlier in the Gold Market Overview, so I don’t want to write too much about this issue here. However, I would like to point out that if high inflation persists, inflation expectations could become more “backward-looking” and increase more than anticipated. The central bank claims that inflation expectations remain well-anchored, as it enjoys anti-inflation credentials. But the longer high inflation persists, the higher the odds that the central bank will lose its reputation when inflation expectations de-anchor. At some point, people will question the “transitory” character of inflation and increase their expectations. Why wouldn’t they, given that the Fed is openly telling that it has changed its inflation targeting regime toward one more tolerant of inflation above the target? The August 2020 Survey of Consumer Expectations published by the New York Fed is illustrating my point. The report shows that one-year and three-year consumer inflation expectations rose to new highs of 5.2% and 4.0%, respectively (see the chart below). What’s important, both increases were broad-based across age and income groups. Well-anchored, huh? The third risk is the accumulation of debt. Private and public debts were very high already before the pandemic, but they surged even further since all this happened. In the second quarter of 2021, global debt rose to a new record high of $296 trillion, while the US total public debt increased to about $29 trillion, as the chart below shows. In relation to the GDP, the debt has moderated somewhat, but it remains much higher than before the pandemic. Such high indebtedness reduces the financial capacity to respond to new economic shocks in the future and raises the odds of debt distress, defaults, or even a full-blown debt crisis. Excessive indebtedness not only entails risks on its own but also complicates the normalization of monetary policy. Although there is a mammoth pile of public debt, the burden of the costs is manageable because the interest rates are at ultra-low level. However, if the central bank hikes them, the debt-servicing costs will increase, upsetting the government. Importantly, the median maturity of the US government debt has effectively shortened, so the changes in short-term interest rates may be even more challenging for Uncle Sam. Let’s do some math. Given that the public debt is around 125% of the GDP (see the chart below), every percentage-point rise in interest rates implies 1.25 percentage-point growth in the fiscal deficit as a share of the GDP. I bet that the government won’t be happy seeing that. What does it all imply for the gold market? Well, even if the pandemic ends (and we are still far from it), our economic problems won’t disappear. We won’t go back to the pre-pandemic normalcy, as the conditions are completely different. First of all, the debt and inflation are much higher. This creates a particularly unpleasant combination. You see, if inflation is not kept in check relatively early, the Fed most likely will have to jack up the federal funds rate to beat inflation later. The problem is that aggressive monetary policy tightening could boost the risk premiums and exacerbate debt problems, possibly even leading to a financial crisis. Given all these risks, it seems unlikely to me that gold could get out of favor. However, these risks don’t have to materialize, and even if they do – I believe that we haven’t seen the full economic repercussions of the pandemic yet – it won’t happen tomorrow. So, it might be the case that gold will suffer first due to a shy tapering of quantitative easing, only to rally later in response to inflation and/or debt crisis. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhD Sunshine Profits: Effective Investment through Diligence & Care.
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold

To Be or Not to Be: How the Evergrande Crisis Can Affect Gold

Arkadiusz Sieron Arkadiusz Sieron 22.10.2021 01:13
Evergrande is on the brink of bankruptcy. Will gold prices collapse together with the real estate developer or benefit from its default? Generals are always prepared to fight the last war, while economists are always prepared to fight the last recession. But what if the next economic crisis doesn’t start in the US financial sector, but in China’s real estate? Naturally, I refer to Evergrande, a Chinese developer with total liabilities of more than $300 billion — around 2% of China’s GDP! A default of one of China’s largest and most indebted companies could entail significant repercussions for the global economy. Although the Evergrande crisis won’t necessarily be China’s Lehman Brothers moment (I will elaborate on this in the upcoming edition of the Gold Market Overview), it will certainly curb China’s economic growth. Actually, the slowdown has already begun, as the country’s GDP grew just 4.9% in the third quarter of 2021, much less than the 7.9% seen in Q2. It was the slowest pace recorded in a year. The slowdown is not surprising. After all, China faces a massive energy crunch, shipping disruptions, and a burst of the property bubble. Until recently, the bubble was tolerated or even actively boosted as it drove income and growth, benefiting everyone: developers, authorities, and also ordinary citizens who placed most of their savings in real estate. The property sector has grown so much that it accounts for about 30% of China’s GDP! So, given the size of China’s economy, it has become one of the most important sectors in the world. However, China’s government decided to curb excessive borrowing and deflate the bubble. Perhaps the irrational exuberance became too irrational – just think about all these ghost towns with millions of empty apartments, not to mention the surge in corporate debt from 112% of GDP in 2008 to 222% in 2020 (see the chart below). So, last year, China’s government introduced the policy of “three red lines” which made it much more difficult for large developers such as Evergrande to issue more debt. This tightening caused a liquidity crisis, as well as a drop in property investment by 4% in September. Here is the problem: the government wants to move away from a growth model based on investment and debt, but the country hasn’t transitioned to a consumption-led model yet. Thus, given the size of China’s property sector and a lack of new growth engines, we should expect a further slowdown in China’s (and global) economic growth. Implications for Gold What do China’s economic problems imply for the gold market? Well, the price of gold hasn’t been affected by the Evergrande crisis so far, remaining stuck below $1,800. Although, please remember that gold is most sensitive to the US economy, and we haven’t seen any signs of contagion spilling over the Chinese borders yet. However, the slowdown in global economic growth caused by the burst of China’s real estate bubble should bring us closer to the stagflationatory scenario, which should be positive for gold prices. The deceleration in China’s economic growth could abruptly change the narrative about a solid recovery from the pandemic, making investors worry more about inflation. A slowdown in economic growth could also lower bond yields, which should be supportive for the yellow metal. Furthermore, even though most of the pundits downplay the risk of financial contagion stemming from the collapse of Evergrande (or other Chinese real estate developers), such a risk exists. If it materializes, gold should shine as a safe-haven asset. Another possible implication is that China might devalue the yuan again. As investments are weakening and consumption hasn’t become a sufficient driver of the economy, the government could bet on exports to support the GDP growth. This could trigger some safe-haven inflows into gold, but there are also some risks here. As I wrote in 2017, “in the summer of 2015, China devalued the yuan, which pushed global equities lower. Hence, a devaluation of the renminbi would imply an appreciation of the U.S. dollar, which does not sound good for the gold market.” 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
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Inflation Has Already Peaked. Has Gold Peaked Too?

Arkadiusz Sieron Arkadiusz Sieron 18.10.2021 11:50
Inflation reached its peak in June, but it doesn’t mean it will go away. The more persistent it is, the higher the odds of a rosy outcome for gold. The August CPI report makes it clear: inflation has already peaked. As the chart below shows, both the overall and core CPI have reached their fastest pace in June 2021. The former index surged 5.3% four months ago, while the latter soared 4.5%. Since then, we have been observing very gradual deceleration in the annual inflation rates. The noticed slowdown seems to confirm the central bank’s narrative that the inflationary surge is transitory. However, in a few past editions of the Fundamental Gold Report, I argued that the fact that inflation had peaked doesn’t mean that it would go away anytime soon. In particular, I pointed out the rallying Producer Price Index (as the supply-crisis is far from being resolved), the gradually rising index for shelter, and soaring home prices, which should translate into higher consumer prices in the future. As the French adage goes, nothing lasts like the temporary. The policymakers always describe unpleasant developments as “transitory problems” (just think of all the taxes introduced only for a while!), as magical thinking that the troubles will somehow resolve themselves is much more convenient than confronting the harsh reality and taking decisive actions. Of course, there is a grain of truth in the Fed’s line of thinking. After all, compared to the long run, not to mention the cosmological timescale, higher inflation will prove to be temporary. Yes, it was sarcasm, but Powell and his colleagues are, in a sense, right about transitory inflation. You see, as the market saying goes, the cure for high prices is high prices. As you can recall from your economics 101 class, prices are set by supply and demand. And when prices rise, producers are willing to sell more, while consumers are willing to buy less. Hence, a surge in the price of a given commodity will result in reduced demand and/or boosted supply. As a result, the price will decrease. We have recently observed this mechanism in action in the lumber market. As the chart below shows, lumber surged during the post-pandemic recovery, doubling its price from February 2020 by May 2021, but now it’s just about 30% higher than before the pandemic. The chart doesn’t lie, does it? So, inflation is transitory, as high prices are indeed a cure for high prices. Lumber’s fate is what’s waiting for all goods. But not so fast. This mechanism works only under certain conditions. It clearly doesn’t apply to hyperinflation, where surges in prices cause a decline in demand for money (consumers lose faith in a currency and try to spend their money as quickly as possible) and, in turn, even stronger price surges. Even more importantly, it applies only to market-specific supply issues, not to the general, economy-wide inflation. When higher prices are a result of idiosyncratic supply constraints, the market forces will work to bring the equilibrium back, curbing the price. For example, the producers of lumber could have outbid other entrepreneurs to obtain necessary inputs and expand their capacity to eliminate the shortage of lumber. However, when almost all prices go up, the situation is different, as all entrepreneurs cannot expand their capacities at the same time because all the inputs are scarce. Why do we know that the current inflation is broad-based and also demand-related rather than caused merely by supply disruptions? Well, the obvious clue is simply the number of markets that are experiencing shortages and sharp price rallies. The supply-chain crisis is not limited to lumber and semiconductors, it covers practically all commodities and many intermediate goods. In such a situation, the root cause of inflation must be excessive demand compared to supply. As I explained earlier in the Gold Market Overview, the consumer expenditures on goods surged 15% over the pandemic. Such an increase over a relatively short period turned out to be difficult to handle by entrepreneurs, especially under epidemic conditions, thus shortages emerged. But these supply-chain problems are ultimately demand-driven, as the supply-side of the economy simply cannot satisfy the consumers’ demand. To be clear, this extra demand hasn’t emerged out of nothing. It’s happened due to a shift in expenditures from services into goods and also because it’s the child of the Fed’s easy monetary policy and lax fiscal policy. The broad money supply is about 33% greater than it was before the pandemic (see the chart below). The widened fiscal deficits financed checks to Americans, which made inflation less limited only to financial assets and more broad-based. What does it all imply for the gold market? Well, the point is that the current inflation is more demand-driven than the Fed is ready to admit. As a result, my bet is that it will be more persistent than the central bank officially claims. More stubborn inflation may accelerate the Fed’s tightening cycle, which would hit the gold market. On the other hand, persistent inflation could at some point rattle the markets, boosting the demand for gold as a safe-haven asset and an inflation hedge. High inflation also implies subdued real interest rates, which should support gold prices. Last but not least, the more persistent elevated inflation is, the higher the odds of inflationary expectations de-anchoring and stagflation taking place, in which gold should shine. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhD Sunshine Profits: Effective Investment through Diligence & Care.