Since starting Direct Bullion in 2015, we’ve written about gold lots of times. You don’t need to look back at an easy conclusion – We’ve been bullish every time. We are still bullish.
Taking a ride in the Wayback Machine, why was everyone so bullish on gold from 2008–2011? Quantitative easing. That seems quaint today, after over a decade of on-and-off money creation, but the thinking at the time was that we would print too much money and it would cause inflation. Took a while, but it eventually did.
They say gold is a hedge against inflation—that it’s a smart risk-management strategy. Maybe it is, but it’s a highly imperfect one. We have lots of inflation, and gold has spent the last eight months going down.
Still, we see gold as a hedge against inflation in the super long run, and one reason we are bullish on it is that we don’t believe the Fed has the willingness to do what it takes to eliminate inflation. They’re talking tough right now, but there are voices within the Fed calling for a pause in interest rate hikes, saying we should consider the cumulative effect of tightening and the lags associated with monetary policy. This is a matter of much debate on Twitter and elsewhere.
A Second Wave of Inflation
If you look at the two other big inflationary episodes in history, the 1940s and the 1970s, you will notice that there were multiple waves of inflation stretching out over the course of years. We are currently on the back side of the first wave. We believe that the Fed will pivot, inflation will moderate for a time, and then we will get a second wave that is even bigger than the first.
Really, though, gold isn’t responding to inflation so much as it’s responding to the Fed. The more the Fed hikes, the lower gold goes. It was up over 3% last Friday on a hint of pausing from Boston Fed President Susan Collins. It doesn’t take much.
Economic data could deteriorate significantly (because the economy is deteriorating significantly). When it does, the rate hikes will stop. The late Paul Volcker is a legend in central banking for stopping the inflation of the 1970s. The economy also shrank by 6% in a year. Powell may think he’s tough, but he’s not that tough. Ultimately, we won’t address the root cause of the inflation (which is the psychology surrounding it), and it will be back again.
Friday’s rally has helped gold prices end the week in positive territory. December gold futures last traded at $1,677 an ounce, up 2% from last week.
Adding to the recession fears, cracks are starting to appear in the labor market. Friday, the Bureau of Labor Statistics said 261,000 jobs were created in October, beating expectations. However, some analysts have said that when one looks past the headline number, there is a growing weakness.
“Looking at the longer term, there is a clear slowdown in new jobs. In the “core” working age group of 25 to 54-year-olds, there was a loss of jobs, a very significant factor. The Fed is not going to pause because of this report, but it is evidence that the employment picture is deteriorating under the surface,” said Adrian Day, president of Adrian Day Asset Management.
Along with growing bullish fundamentals, many analysts note that gold’s technical outlook has turned positive.
