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AGE Gold Commentary is our regular report analyzing trends in precious metals and rare coins. We monitor domestic and international markets and extrapolate from our 30 years in metals to place current events into a hard asset perspective. View archives.


11/1/2021: Gold's next leg higher

Recovery's high cost
Slowing job creation
Stickier inflation
Negative real yields
Taper nightmare
Bullion and US gold coins

Greetings!

From August 2018 to August 2020, gold gained an astounding 75%, rising almost $900 an ounce to an all-time high of $2,067. For much of 2021, the metal consolidated those enormous gains, correcting first below $1,900 and then $1,800 as the global economy clawed its way back from near-total shutdown.

Now, this correction phase appears to be ending. Stalled growth, exploding debt, negative real interest rates, and mostly importantly, sharply higher inflation have become the new normal. All of them support higher gold prices. In this Gold Commentary, we drill down on these potent fundamentals and discuss how they will contribute to the next leg higher in this continuing bull market for precious metals.

Recovery's high cost

Fueled by near-zero interest rates and some $5 trillion in pandemic aid, the economy has come a long way from the darkest days of 2020, when Covid plunged the US into the deepest recession since the 1930s. But the cost has been high and the recovery incomplete so far.

Our national debt has ballooned to almost $29 trillion, some $6 trillion more than just two years ago, behind record amounts of fiscal stimulus. Meanwhile, the Fed's balance sheet, reflecting the amount of cash it, too, has poured into the economy, is at $8.1 trillion and counting, nearly double pre-pandemic levels.

With all this cheap money flooding the system, it's no surprise that inflation is now surging at the fastest rate in 30 years. The Consumer Price Index showed inflation in September at an annualized 5.4%, more than double the Fed's target 2%.

Yet the recovery appears to be stalling. GDP growth fell to 2% in the third quarter of this year, down from 6.7% in Q2 and by far the weakest growth since the rebound began in Q3 2020. Job gains have been anemic for two straight months. Manufacturing has been strangled by supply and labor shortages.

Even the housing market, star of the economy for years, is showing signs of petering out. Pending home sales fell 8% for the year through September.

Perhaps most alarming, consumer sentiment is hovering near pandemic lows while consumer spending, which comprises nearly 70% of GDP, grew at just 1.2% in Q3. The primary reason? Worries about inflation.

The Federal Reserve has a dual mandate of achieving full employment while maintaining price stability. These contrasting tasks, always uneasy partners, have become the horns of a dangerous dilemma in the Covid era.

To help the economy regain 22 million lost jobs, the Fed has flooded the system with cheap cash through near-zero interest rates and monetary easing of $120 billion per month. Knowing this approach would be highly inflationary, the central bank adopted a new methodology of "inflation-averaging" in Q3 of 2020, allowing inflation to run well above its 2% target for as long as it had been below that level.

In other words, the Fed blinked with one eye, winking at inflation while choosing to focus on job creation. That decision is now coming back to bite the central bank--and the rest of us--in the form of incipient "stagflation," a nasty combination of economic stagnation and excessive inflation that can have devasting consequences once it takes hold.

To control inflation, the Fed will have to end monetary easing and start raising interest rates. But to maintain the recovery and heal the labor market, which is still around 6 million jobs below pre-pandemic levels, the economy needs more life support. A dilemma, indeed.

Slowing job creation

Job creation has certainly hit the brakes in recent months. Whereas the economy added 962,000 jobs in June and 1,091,000 in July, the totals shrank to 366,000 in August and merely 194,000 in September.

While two data points don't qualify as a trend, there are reasons to be concerned about the labor market's ability to return to pre-Covid strength. For one thing, the workforce is shrinking, which partially accounts for the low 4.8% rate of unemployment.

According to the BLS, an unprecedented 4.3 million people quit their jobs in August. While many may have moved on to better positions, many others have simply opted out. By some estimates, up to 1.5 million people have left the workforce because of fear of infection. Many others are refusing to work because of vaccine mandates--call it fear of injection.

As we have said many times, US economic strength is contingent upon the rate of job growth. By favoring full employment over controlling inflation in the short-term, the Fed risked letting the inflation genie out of the bottle. When it tries to rebottle that genie by raising interest rates, new damage to the labor market may well ensue. Again, dilemma, indeed.

Stickier inflation

The disruption of the global supply chain and chronic labor shortages caused by Covid are two of the main reasons for inflation's stubborn surge over 5%. After 15 months of insisting inflation is "transitory," Fed Chair Jerome Powell has changed his tune.

"The risks are clearly now to longer and more persistent bottlenecks and thus to higher inflation," Powell recently admitted. "We now see higher inflation and the bottlenecks lasting well into next year."

Adding to that sentiment, as James Rickards said at the New Orleans Investment Conference last week, global supply chains that took 30 years to build have been fractured or broken altogether and may take 5 years or longer to rebuild. In other words, higher prices caused by supply-chain bottlenecks are likely to persist well beyond next year despite Powell's new stance.

Commodity prices are surging, as we expect in periods of rising inflation. Oil prices have jumped from $50 to over $80 per barrel this year. Copper is 30% higher than in January. In the words of Unilever CEO Alan Jope, speaking on Bloomberg TV: "we are in a once-in-two-decades inflationary environment."

And "sticky" inflation has also arrived. Rising wages, rents, and entitlement payments are all considered sticky because, once elevated, they are very slow to come down.

Average hourly earnings from April to June rose by an annual rate of 6%, according to the BLS, two to three times the typical growth rate of the last several decades. Year-over-year rents are up over 10% nationally, according to Zillow Group. And the SSA is lifting Social Security benefits by 5.9% next year, the most since 2008.

All this implies inflation is here to stay, and that's bullish for gold.

Negative real yields

In recent years, gold prices have moved sharply higher when the real yield on US Treasurys has turned negative. We saw this is 2009 through 2011 and again last year. Both times, the gold price surged to all-time highs.

A negative real yield is when the rate of inflation is greater than the rate of return on an investment, most frequently measured against benchmark 10-year US Treasury yields. If the 10-year Treasury yield is 1.5% and the inflation rate is 2.0%, the real yield is negative 0.5%.

Real yields chart

As you can see on the chart above, real yields on 10-year Treasurys plummeted to the lowest level in decades this summer. Gold surged between 2009 and 2011 under similar circumstances, only this time, real yields are much deeper into the negative. The fact that gold isn't already much higher is perplexing. The gold market has been acting as if inflation, indeed, is temporary. But this belief is beginning to change.

The US economy enjoyed growth above 6% in Q1 and Q2. This strong performance fueled record-high stock market returns, undercutting the higher gold prices that deeply negative real yields would have otherwise triggered. A rising tide floats all boats, masking the underlying problems of exploding debt, labor shortages, and inflation.

With US GDP skidding to 2% in Q3, and with growth also slowing in China, Japan and in the Eurozone, negative real yields should increasingly come to bear in the form of higher gold and silver prices.

Taper nightmare

The Fed is set to begin tapering its $120 per month bond-buying program in coming months, with the intention of ending it altogether by mid-2022. Only then can it begin to raise interest rates to control inflation.

During the last cycle of tapering and tightening, in 2014 and 2015, the time-lag between the end of easing and the initial rate hike was 15 months. Then another year passed before the second increase, another quarter-point, in December 2016. So, it took the Fed more than two years to lift interest rates from near-zero to 0.5%.

How quickly the Fed tightens this time will depend on inflation and the global recovery. During the last cycle, rates only rose to 2.5% before a weakening economy forced the Fed to cut rates again in 2018.

Given the damage done by the pandemic, the Fed may have trouble getting rates to 2.5% without crippling growth. But even if rates get that high, and even if inflation moderates to just 3%, real yields will continue to be negative. And that, as we've seen, supports gold.

The perfect scenario for the Fed, of course, is low inflation with low interest rates. This situation would allow our staggering national debt to be paid back with cheaper dollars, and it may well be the Fed's goal. But neither inflation nor the recovery is likely to cooperate.

The combination of rising inflation, higher interest rates, and a weakening economy creates a nightmare scenario for the Fed. It would also be devasting for the overvalued US equity markets. But it would give gold explosive upside potential.

Let's look at the latest charts

Gold

When the Fed first discussed tapering monetary easing at its June policy meeting, the dollar and Treasury yields responded with a modest bounce. Gold, in turn, shifted into a lower but less volatile range, as you can see in the chart below, with its 50-day and 200-day moving averages dipping but showing far less volatility recently.

Gold chart

The metal entered a classic consolidation pattern where lows are bought, and highs are sold, as the market looks for new direction going forward. Gold is currently in an $1,725 to $1,830 trading range (indicated by the green support and red resistance lines) with the major support and resistance just under $1,770 as the pivot point (indicated by the long green and red support/resistance line).

It's worth noting that gold's tumbles below $1,750 in early August and late September were event-driven and temporary. The first was caused by a blowout nonfarm payrolls report of more than a million jobs added. The second followed the near default of Evergrande, the behemoth Chinese property developer, which caused a panicked rush to liquidity in Asian markets. In both instances gold recovered sharply.

The green and red support and resistance line found at $1,770 is the previous upside resistance point, going back to March through June 2020. When gold has been pressured under this level it has been bought back up, cautiously last spring and more readily during event-driven dips of August and September.

Gold is finding strong short-term support at $1,725 and again at $1,770. Major support will be found at $1,675. Conversely, upside resistance is at $1,800 and again at $1,830. For gold to make a convincing move higher it must hold above $1,830, which will put the recent high of just over $1,900 back into play.

Gold under $1,750 in this market is an absolute buy in our opinion. Given the fundamentals outlined above, we see many more reasons for gold to rise, potentially much higher, than for it to drop.

The Fed is the elephant in the room. It must tread very lightly, something elephants are not known for doing well, to douse inflation without also snuffing growth and crushing stocks. Missteps in either direction will be benefit gold, as an inflation hedge on one hand or a safe-haven asset on the other.

Silver

Silver continues to trade in a wider than normal range, currently from $23 to $29.50 with $26 as the pivot point. After the Fed's June taper talk, it tumbled from $28 to the recent low of $21.49. The good news is, silver made a strong rebound from this bottom, indicating the worst may be over.

Silver chart

As most of you know, silver tends to lag gold and then play catch up. It also oscillates in a wider trading pattern than gold, offering relatively outsized highs and lows. The liquidity crunch driven by Evergrande's near-default in September catalyzed the selloff in all precious metals. But compared to gold, which is more of a monetary metal, the other three were hit harder due to their uses as industrial metals.

In the short-term, silver will find support at $22.50 and major support at $21.50. To the upside, resistance is at $24.50 and again at $26. Beyond that, resistance will be found at $28, with major upside resistance at $29.50.

Unfortunately, when a market tumbles like silver has since early June, the recovery can be a little longer than usual. Resistance at $24.50 and $26 may prove stubborn. Under $24.50 is a great silver buy in the current environment.

Platinum

Platinum skidded lower after the Fed's June taper talk and hit a new 2021 low in September following the Chinese Evergrande liquidity crunch. Used primarily in diesel automobile catalytic converters, its drop has been exacerbated by the global economic slowdown currently underway.

Platinum chart

Platinum broke out above $1,025 in late 2020 for the first time in several years. Since then, $1,025 has become a major support and resistance level.

As you can see by the green and red support and resistance lines on the chart, platinum has been moving in $125 trading ranges. While it has rebounded sharply from its knee-jerk low of $899 in September, it may consolidate further before making sustained move higher into the $1,025 to $1,150 range.

We expect platinum to trade sideways for the next month or so, then establish a tighter range between $975 (green support line) and $1,050 (red resistance line) in the short-term. This would be a typical consolidation phase, like the one gold already established.

Platinum will find support at $975 and major support at $900, which would be an excellent buying opportunity should that opportunity present itself. Upside resistance will be found at $1,050 and again between $1,125 and $1,150.

Palladium

Palladium suffered the sharpest decline of the four precious metals during the recent correction. Used primarily in gas automobile catalytic converters, it has been especially hard hit by the global slowdown in automobile manufacturing due to microchip shortages. Automobile sales have been declining for six months now, which is coincidentally a leading recession indicator. However, chip shortages are also playing a big part in this slowdown with manufacturers having fewer cars to sell.

Palladium chart

Vastly outperforming gold from 2020 into mid-2021, palladium appeared bullet proof, marching steadily higher except for the Covid-related hiccups. As the blue trendline indicates above, the rise was relentless, starting with the August 2018 bottom of $837 and continuing through the May 2021 peak of $2,986.

Since July, however, this trend has reversed. Palladium has shredded a full $1,000 per ounce in four months. While a major correction has been overdue, the magnitude is stunning. But reversal of this magnitude can create superb buying opportunities.

Unlike gold, which has mostly moved through its correction phase, palladium is still establishing both short-term and long-term support and resistance levels. In the current market, we see short-term support at $1,850 and resistance at $2,150. We expect palladium to trade within this range for several months before its consolidation in finished.

Palladium's performance going forward will be dictated by gas car sales and choices made by automakers. The extreme $1,550 difference between palladium and platinum prices last May could incent automakers to replace palladium with platinum in gas catalytic converters. The changeover would not be easy but might be worth it. The result, of course, would be higher platinum and lower palladium prices.

Bullion and US gold coins

Modern bullion

Premiums for almost all modern bullion coins and bars have normalized over the last several months. The lone exception is US Silver Eagles, which continue to trade at elevated premiums. With sovereign mints around the world now converting from 2021 to 2022 issues, some minor delays in delivery are happening but nothing out of the ordinary.

Silver's recent dip below $22 created another buying wave that cleaned out the shelves and created some minor backlogs in silver bullion. Silver bars, particularly 10 oz and 100 oz bars, have spotty availability depending on the manufacturer. Some bumps in the supply chain are still happening, depending upon demand, but again, nothing out of the ordinary.

Availability of US Platinum Eagles and Canada Platinum Maple Leafs remains very tight. The mints are likely done with 2021 production and very few coins are available in the secondary market.

We do have a small quantity of 2021 US Platinum Eagles 2021 at spot plus $129. In addition, 1 oz and 10 oz platinum bullion bars from various major refineries remain in good supply.

Physical palladium is very difficult to source. Production of coins and bars, whether by sovereign mints or private refineries, is not continuous. When supplies do show up, they disappear quickly.

However, the US Mint is finally releasing the 2021 US Palladium Eagle next week, so we do have some coins available at spot plus $225.

Pre-1933 US gold

Premiums on pre-1933 US gold coins have edged lower over the last few months, reflecting a softening of demand after gold's pullback in August and September. Nonetheless, supplies in the national market remain tight overall, so any new surges of demand will move the markets higher pretty easily.

For speculative investors, based on their previous market highs and current prices, we recommend $20 Saint-Gaudens MS65, $20 Liberty MS64, $10 Liberty MS64 and $10 Indian MS64. All have enough scarcity to offer outsized gains during periods of strong demand, yet they are trading at moderate premiums and prices relative to their 20-year price histories.

For more conservative investors, we have a special on 1899-P $20 Liberty gold coins in MS63. This issue is relatively scarce, with a population of just 13,726 coins today. For reference, the common date for the series, the 1904-P, has a population of 153,057 coins, making the 1899-P 11 times scarcer in the marketplace.

Trading at a 5% premium to the common 1904 date, the 1899 is an excellent value. Supplies are very limited. Please call 1-800-613-9323 to order coins from this very limited offer.

For bullion buyers who want a little muscle, our AU $20 Liberty special is a great value. These coins are trading near spot today but offer the potential for expanded premiums in a hot market.

That's it for now. As always thanks for your time and your business. Best wishes for a safe and happy upcoming holiday season!

Sincerely,

Dana Samuelson
President

Metal Ask      Change
Gold $1,847.19           Price Change Up Arrow $3.49
Silver $24.45           Price Change Up Arrow $0.19
Platinum $1,060.74           Price Change Up Arrow $27.15
Palladium $2,083.50           Price Change Up Arrow $50.46
In US Dollars