Gold will have its day of glory, but don’t jump the gun

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The trigger for the latest jump in gold was the dramatic drop in real US 10-year bond yields (TIPS) to minus 0.92 pc. Specifically, the 10 years rate of return capturing inflation expectations is booming, but at the same time, the Fed is keeping nominal rates down through financial repression. It is this scissor action that determines the price of gold.“This is what prompted speculative movements over the past two weeks. There is a feeling of nascent inflation and the hedge funds are piling up, ”says Adrian Ash of Bullion Vault. “Swiss private banks also recommend a 10% allocation in gold.”

Behind the movement hides a powerful slower force. Central banks no longer sell gold. Gordon Brown’s UK bullion sales look extraordinary now.

Russia’s central bank has absorbed 80% of the country’s gold production, pulling the world’s third-largest source of mining supply from the market. China, India and Turkey have piled up, as have Poland, Hungary, Bulgaria and the Czechs. Central banks bought 656 net metric tonnes in 2018 and an additional 650 tonnes in 2019, the highest levels in fifty years.

“It has been absolutely phenomenal, but at the moment gold has gotten ahead of itself and needs to catch its breath,” said Ross Norman, a seasoned gold trader at Metals Daily.

Needless to say, the Fed denies debauching the dollar, insisting that the Covid shock has left overcapacity rampant and will be “disinflationary” for years to come. Former Fed Chairman Ben Bernanke told Congress last week that markets were wrong to bet on inflation when QE was first launched, and they are just as wrong now.

He has a point. Real rates collapsed in much the same way in 2012, but that turned out to be a false alarm. Stocks inflated, but consumer prices did not. Inflation fell for the next three years. The question, then, is whether something has fundamentally changed in monetary dynamics since then.

Professor Tim Congdon of International Monetary Research says QE didn’t catch fire last time because the western banking system was broken and Basel regulations made matters worse by forcing lenders to raise fund cushions clean. Central banks had to accelerate QE to compensate for the subsequent destruction of the M3 money supply.

Lenders are now in better shape and the Fed’s $ 3 trillion QE explosion since March has this time led to a 27% increase in M3 money supply year over year, the fastest increase since the wave of war in 1943. The money is in the bank accounts. wait for inflationary ignition once life returns to normal. The Fed could suck up excess liquidity before that happens, but clearly has no intention of doing so.

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