E Thoughts About Gold Recent Sell-Off

Key Factors for Gold Bulls

With the continuous change in the economy, the prices of gold are expected to go higher this year. Many significant factors such as debt, inflation, bond rates, and the Fed’s balance sheet show that gold prices should jump higher soon. June/July are seasonal pullback months, and after the pullback is over, prices must return to their projected course.

Let’s what these factors are implying about gold.

The Fed’s balance sheet

The Fed’s balance sheet has expanded greatly over the past few years. It was nearly $880 billion before the occurrence of the financial crisis in 2008. After many quantitative easing, the balance sheet has expanded to nearly $8 trillion today. The Fed is continuously buying dollars to support the US economy.

(Click on image to enlarge)

Image source: Fred economic data

US monetary base

The Fed’s balance sheet has a direct effect on the US monetary base. In 2007, it was around $800 to $900 billion. Then with the start of the financial crisis, Fed kept buying Treasuries and supporting the US economy which led to the increase in the monetary base, too. Today, the US monetary base has reached nearly $6 trillion. It is expected to keep expanding with time.

(Click on image to enlarge)

US monetary base
Image source: Fred economic data

US federal debt

Like the Fed’s balance sheet and US monetary base, US federal debt also keeps on increasing. Today, it has reached approximately $23 trillion. Also, the Fed debt to GDP ratio has also increased to 128% which is many times higher than the value during previous years. The US spends around $3.6 trillion more than it produces. The current pandemic has worsened this condition even more.

(Click on image to enlarge)

Image source: Fred economic data

US treasury

Like other forms of debt, US federal debt should be serviced. The US has a debt load of around $23 trillion. And the servicing yields of America resemble the 10-year yield. At the present debt situation, the taxpayers will have to pay around $380 billion in the servicing payments of the whole year. So, we can see that the load of the US debt will keep on increasing constantly in the coming years.

(Click on image to enlarge)

Image source: Fred economic data

Funds rate

Before Fed was able to increase the fund rates and keep them the same but today it cannot do it anymore. From 2016 to 2018, the Fed did try to normalize the fund rates, but then it was found out that the US economy could not work well with the fund rates higher than 2 percent. The system has to pay a huge debt and its economy has gotten used to oddly low fund rates. So, an increase in the fund rates in the future is not expected.

CPI inflation

CPI inflation is used to measure consumer inflation. Today, CPI shows an increase of 4.2% YoY which has happened for the first time after 2008. In 2008, fund rates were around 5% but today they are zero. Now a heightened inflationary environment has been created during the low funds' rate era.

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