By Jeff Clark, Senior Analyst, GoldSilver, and Adviser for Strategic Wealth Preservation
Gold and silver prices peaked in August 2020, and have since been largely range-bound. But the potential catalysts are stacking up like firewood, the recent breather hinting that prices are coiling for the next significant uptrend. Here’s why…
Bond Yields: Yields spiked in early 2021, but what matters more for gold and silver is the real interest rate (10-year Treasury yield minus CPI), which is largely expected to remain in negative territory for the foreseeable future. Why? The first reason is because the Fed can’t raise nominal rates too much, since interest on the debt would overwhelm federal spending. As this long-term reality sets in for mainstream investors, gold and silver demand will rise. The second reason is…
Inflation: It’s no longer an “if” question—inflation is here. The April CPI (reported on May 12) hit 0.8% month-over-month, an annualized rate of 4.2%, the largest monthly jump since 2009 and twice as high as analysts expected. All indications are that the move in higher rates of inflation is just getting started. And don’t expect the Fed to come to your rescue: they’ve made it clear they’ll let inflation remain over 2% for a while before taking any action, especially when they see deflation as a far bigger risk. Inflation is strongly supportive of higher gold and silver prices.
Fiscal Injections: One of the biggest catalysts continues to be the massive liquidity injections from governments. And we’ll point out that fiscal stimulus is different than monetary stimulus, in that it gets injected directly into the economy, a fact that can ignite inflation as much as economic activity. It also impacts the…
US Dollar: The extent of currency debasement cannot go on without impacting the dollar. Most analysts predict a sideways or lower dollar in the short-term, and significant weakness in the long-term, due to ongoing devaluation actions. Since gold is universally priced in US dollars, it benefits directly from a weaker currency.
Bubbly Asset Prices (including Bitcoin): By any objective measure, stock prices are overvalued. Real estate values in most areas have risen every year for over a decade, and last year spiked as big as any one-year gain ever seen. Bitcoin was called the “most crowded trade in the world” in a BofA poll of fund managers. Gold has historically served as a hedge against asset selloffs, in many cases even better than US Treasuries. It’s the hedge every portfolio needs at this point in history.
Black Swan: Similar to getting an unexpected phone call from the hospital, the current environment grows increasingly ripe for a surprise negative event. Gold can shield against such a development, a fact that spans thousands of years.
The use of gold as a portfolio diversifier is likely to be increasingly important over the coming years. Higher prices will be seen when demand from investors and even ordinary citizens grows, in response to one or more of these catalysts playing out.
Senior Precious Metals Analyst
This article was originally posted in the Strategic Wealth Preservation Blog and copied here with the permission of the author.