Gold In Q2: Price Stabilizes, While Potential Catalysts Build

Many drivers, however, appear to remain in place: mortgages below 3%, a post-pandemic desire for more space, newly-remote workers relocating, and perhaps FOMO—the fear that one might need to buy now before it gets even more expensive. As with stocks, gold can hedge against reversals in real estate prices.

Higher Taxes

In addition to the prospect of higher tax rates in the U.S. to fund new spending plans, a group of 130 nations recently agreed to a global minimum tax on corporations, part of a “broader agreement to overhaul international tax rules.” Higher tax rates could depress company earnings, or add to inflationary pressures if costs are passed on to consumers.

Silver Outperformance

Part monetary metal like gold, but also an industrial metal whose uses will climb in the infrastructure spending plan, this dual role could push silver to advance more than gold. It’s noteworthy that silver rose more than gold in Q2, and is down less YTD.

The gold/silver ratio (gold price divided by silver price) ended Q2 at 68.5; despite the decline from its record high of 123 in March 2020, the ratio is still 24% above its long-term average of 55, showing it remains undervalued relative to gold. The ratio fell to 32 in 2011.

Black Swans

The environment remains ripe for an unforeseen event. Potential candidates include a spread of COVID-19 variants, fallout related to the Fed's reverse repo facility now near $1 trillion, or issues surrounding the deadline for reinstatement of the federal debt ceiling at the end of July. Another shock to the global economy or markets would underscore the importance of gold’s hedging abilities.

The Precious Metals Hedge

The circumstance of rising inflation, large fiscal stimulus plans, and elevated stock and real estate prices creates an ideal scenario for gold. The most likely scenario for the second half of 2021 is one where gold continues to offer a meaningful and necessary hedge, along with the distinct possibility of yet another set of record high prices.

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