According to John Feeney, business development manager at Guardian Vaults, an increase in inflation will lead to a simultaneous increase in precious metal quotes and the yield on 10-year US Treasury bonds. The following are the statements of the expert.
One of the main motives for buying gold is the need to protect against inflation. Inflation tends to rise as a result of the rapid increase in the money supply. Last year saw its unprecedented growth worldwide.
This year, the yellow metal lags behind the growth rate of yields from treasury bonds. The dollar against this background also intensified. However, the current correlation between gold and bonds is not natural. There is no economic law that states that bond and gold yields cannot grow at the same time.
So, during the inflation period of the 1970s. The profitability of both assets increased at the same time.
In 1972-1982, the yield on 10-year Treasury bonds rose from 6% to 15%, the Fed's cash rate jumped from 5% to 20%, while the gold exchange rate rose from 50 to 650 dollars per ounce. Consequently, the yield of precious metal was over 1000% in dollar terms, despite a sharp increase in interest rates and bond yields. In the 1970 "s, Richard Nixon, President of the United States, sought at all costs to achieve significant economic growth and low unemployment, while ignoring rising inflation. The sharp jump in the money supply preceded a period of rampant inflation.
Investors know that in the 1970s the gold standard was abolished, which also contributed to rising prices.
Currently, the markets only talk about a negative correlation between gold and rising bond yields, but everything will change as inflation begins to rise. If its level goes out of control in the coming years, then the risk of possessing precious metal will decrease to almost zero, since with a high degree of probability it will become a very profitable asset under such conditions.
Where is inflation?
Last year, the money supply in the United States increased significantly. M1 grew from 4 to 16 trillion dollars per year, that is, by almost 300%, and M2 - from 15.5 to more than 19 trillion dollars, that is, by 22%.
Where, then, is inflation? Will it be temporary, as predicted by the Fed? The delay in inflation is due to the low rate of money circulation. This key figure captures the time during which the currency unit is used to purchase goods and services, which is the result of aggregate growth. So, this indicator decreased, since the lion's share of monetary incentives did not come into the hands of most economic agents (or the so-called lower 90%).
However, this situation will soon change, as stimulus packages from Biden fall into the hands of ordinary Americans. If the speed of circulation increases, then inflation will go uphill. When people start spending printed money, the price pressure will increase. As the economy improves and lockdowns collapse, the speed of circulation will increase even more. That is why over the past ten years there has been no serious inflation when you look at the consumer price index. The speed of money circulation was low. This figure has decreased since about 2000.
Inflation will be trumpeted in all media by the end of this year, next year and until 2023.
In the quotations on the bond market, the probability of an increase in inflation over the next few years is already included, and this is not the case in the gold market. Inflation will increase so much that central banks will have to raise rates to combat it.
Once inflation begins to rise, its pace will be much faster than the Fed predicts.
Representatives of the US central bank have recently taken a position that can be compared with Nixon's position, namely, no one is going to tame inflation, even if it overcomes the target. The Fed is more worried about low unemployment and economic growth, but not about inflation. The current situation is similar to that of the 1970s. However, inflation will now rise much more than the Fed expects, and its representatives will not be happy with this fact.
Gold will double in five years
Inflation has a positive effect on gold, since in such conditions investors willingly acquire precious metal. Many investments will come in the yellow metal, which plays the role of a hedging tool. A similar situation unfolded in the 1970s. Inflation may again become the main reason for the purchase of precious metal, allowing gold to rise in price much faster than at its natural growth rate.
As for prices, it should be said that the yellow metal is currently trading below the highs of 2011. However, given the amount of money created since 2011, gold quotes can easily double. It will take five years or so.
In the short term, gold will not need inflation to rise above $1,800 per ounce. There will be no big changes in inflation over the next few months, but gold can regain lost ground purely due to technical reasons, namely oversold. Technically, the rate can increase to $1,800 per ounce.