The price of gold has now surged above $1,900 but this is what is really shocking.

Time For Gold To Shine?
February 17 (King World News) – Top Citi analyst Tom Fitzpatrick:  
Almost unnoticed in the background of everything going on in markets and Geopolitics this year the Gold price has looked increasingly resilient.

We are now getting to the point where we could be on the cusp of a strongly bullish development.

We have constantly articulated that the present setup on Gold is amazingly similar to that seen in 2011-2012 (Blue circles below).

However, we have also made that statement that is one of the most dangerous ones to make in financial markets i.e. It’s different this time…

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Why do we believe that?

In 2012, just like now, this pattern looked like a double bottom within a triangle that would have ultimately be expected to break to the topside.

The double bottom, if completed suggested new all-time highs.

While we did test the double bottom neckline at $1,791, we could not sustain a break above and over the following 8 months Gold fell sharply.

What was different then to now?

·         Firstly, at that time Core CPI was at 2% and falling after having peaked at 2.3% in early 2012. During that sharp 8 month fall in Gold we saw it fall even further to 1.6%.

·         US 10-year yields were around 1.75% as Gold turned lower (just 25 bp’s below inflation) and after that sharp 8 month fall in Gold, they stood at 2.66% (106 bp’s above the Core CPI level as the Taper tantrum kicked in)

·         During that period, we also saw the DXY rally over 7% and the S&P rallied about 12%

·         Today, Core CPI is at 6% and likely rising even further in the next 3 months as we see low numbers drop out of the calculation from Jan-Mar, 2021- (Zero; +0.2 and +0.3 respectively)

·         The 10-year yield stands at 1.97% (403 bp’s below the rate of inflation). Even if, as we think likely, these yields head up towards 2.5% they will still likely be hugely below the rate of inflation.

·         We have constantly articulated that 

o   US fixed income and equity markets look likely to struggle this year

o   The inflation “Cat is out of the bag” and it will be very challenging for the Fed to “get it back in”

o   We expect this dual dynamic of US Asset markets together with a Global re-opening to weigh on the USD

o   We remain bullish on Commodities overall including Oil and industrial metals/Copper

·         On top of this there is a danger of ongoing sporadic Geopolitical headlines

All this paints a very different backdrop to 2012-2013

A break of the double bottom neckline at $1,917, IF seen, would target, at minimum, a move to at least $2,143-$2,157 (decisive new all-time highs).

Given the dynamics and views detailed above we suspect that we could potentially go much further than that.

Price Of Gold Headed To New All-Time Highs

In addition, when we look at the charts below, it is hard not to think that Gold is now re-establishing its position as a potential inflation hedge (Something that we have not really seen since the late 1970’s)

That followed the abandonment of the Gold standard in August 1971 which fits nicely with the “Fed Regime” in place during that period which we spoke  in length about in our weekend piece.

The charts below only serve to further strengthen our view that it is going to be hard, if not impossible” to get that inflation “cat” back in the bag anytime soon.

Widest Spread Since 1980!

“Inflation is always and everywhere a monetary phenomenon”
— (Milton Friedman)

Money Supply (M2) Has Exploded!

The only picture maybe scarier than this is….

Ratio Of Money Supply vs GDP!

Money is not relatively cheap as it has been on several occasions over the last 25+ years of suppressed inflation- It is essentially FREE.

Rates are so far below the rate of inflation, and we are still to an extent hanging on the “Hope” that this will rectify itself relatively soon (2022).

·         I do not see the required monetary policy adjustment (Nominal short-term rates above inflation) or fiscal pullback materialising anytime soon to temper this

·         I do not see the Commodity bull market as having yet run its course

·         I do not see the supply chains able to cope with the imminent Global reopening

·         I do not see US assets (Fixed income and equities) performing well this year

·         I do not see this as a positive backdrop for the USD in this world

On the back of the above I see Gold shining brightly in 2022 and possibly beyond.

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