Gold: Welcome To Inflation 2020
Fundamentals
The gold market has been filled with uncertainty for the past seven years. Large institutions have been selling naked paper shorts to depress the price of gold. Now commercials, which are primarily central banks, have committed about $39 billion on the short side of the gold market. The number of contracts that they had short was far beyond any annual production of gold or silver.
On September 1, the high was about $2001. Gold then entered into an area that the VC PMI recognized as a high probability of supply coming into the market or sellers. Every time the price of gold rises, it gets clobbered by massive amounts of short selling, which has nothing to do with the underlying supply and demand or production. Since then, gold traders have been challenging the artificial supply that comes into the market when the price is just about to break out to the upside or make a new high. From $1900 in 2011, they drove the price down to about $1167 in August 2018. In March 2020, gold fell about $200 down to $1454 from about $1700 in a brief time. This marked a change in paradigm in gold. Central bankers have been trying to keep investors out of gold and keep them in the US dollar or US-dollar assets. If you buy gold, you are, in effect, selling dollars. To keep the dollar up, central banks wanted to keep investors out of gold. They want investors to stay in fiat currencies. They don’t tell you that over time, inflation devalues the value of the dollar or any fiat currency. Since 1971, when the US went off the gold standard, the US dollar has lost more than 90 percent of its value. You may be worth more in absolute numbers, but your buying power has plummeted.
Courtesy: TD Ameritrade
In 2008, we went into a credit crunch. There was a shortage of dollars. The response of printing unlimited amounts of currency and offering almost zero percent interest devalued the US dollar. Now, during the current pandemic, printing even more money just devalues the dollar even more, as well as all of the fiat currencies. Gold and silver have intrinsic value. They will go up in the mid to long term against the dollar. How are we going to pay for all of the currency they are printing? Partly through inflation. Prices are rising in many sectors. Government inflation removes out energy and food, so it is a false indicator of inflation. Real inflation is far higher than government figures indicate. Soybeans are at a five-year high, above $1162. Grains are rising in price rapidly, as are many other commodities. Soybeans are a leading indicator of the price of food, and its increase in price is a strong sign that inflation is coming. Part of the inflation is based on printing dollars, while some is due to disruption in the supply chain for food and many other goods. We are going to see some tightness of supply. We have enough food, but getting it to where we need it is more difficult during the pandemic. It is more difficult to harvest food with migrant workers unable to work. This factor will increase prices. We expect a sharp rise in the price of food. Soybeans went from $8 to almost $12 is an almost 50% increase. Beans in the teens? Possible. That is just the soybean itself, which then translates into increased prices in all soy products. Soybean meal was at $280 in May and is now at $401. Wheat went from $471 to $638. Corn went from $301 to $428. These are basic products that are used in many other products. If the price had doubled in the field, what does it mean for the retail side? Welcome to inflation.
Gold is like a sponge that absorbs all of these economic, fiscal, and political indicators and decisions. Printing a lot of money is bearish for the dollar and bullish for gold and silver. The more they print, the more they jeopardize the US dollar as the world’s reserve currency. You are going to hear more about gold, silver, and food products (grains) rising in price. It will happen relatively fast. These markets anticipate the future, especially in terms of inflation. That is what is happening.
We are seeing inflation in commodities. We may be heading toward another lockdown. Regardless of the type of lockdown, it is not good for the world economy. It is difficult to be too optimistic about rising stock prices and a vaccine because we are facing a lot of economic damage and we are already seeing inflation. If the economy picks up speed, then the government will raise interest rates to avoid too much inflation. However, with massive debt around the world, governments can’t afford to raise interest rates. It would cause extensive and worldwide defaults on loan payments. Governments may soon find themselves between the rock of inflation and the hard place of raising interest rates to combat it.
Central bankers are now in a heated battle to keep the price of gold from exploding to $2500 or $3000 relatively fast. They are defending the US dollar to attempt to maintain at least some of its value. We are in a short-, intermediate- and long-term break out mode for gold. We are recommending buying gold.
Gold
Gold is at $1860. We have come down into the daily Buy 1 level according to the Variable Changing Price Momentum Indicator (VC PMI). There is a 90 percent chance that the market will revert from the Buy 1 level back up to the mean, so it is a good time to buy. The daily mean is $1875. The extreme levels above that mean is the Sell 1 at $1890 and the Sell 2 at $1905. The first level below the mean is $1860 and the Buy 2 level is $1845.
Disclosure: I am/we are long GDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business ...
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