Sept. 15, 2022
With markets cratering and inflation at multi-decade highs above 8%... investors are turning to gold as the most trusted asset for protecting the purchasing power of one’s wealth.
To that end, gold has been doing its job well and — although down slightly for the year — has been outperforming most other asset classes by a factor of multiples thus far in 2022.
— 2022 Year-to-Date —
Yet, historically speaking and from an inflation hedge standpoint, gold should be trading much higher than where it is today — which is currently just above the $1,700 per ounce level.
As you can see in the YTD gold chart below, the yellow metal spiked above $2,000/oz in early-March — very close to a record high — immediately following Russia’s incursion into Ukraine.
High interest rates also mean that holding gold — which is priced in US dollars — has an opportunity-cost given that it doesn't pay interest like a US certificate of deposit.
Yet, a closer look reveals that gold is absolutely soaring when priced in many global currencies as inflation grips the entire world.That initial spike wasn’t a big surprise to seasoned gold investors as the yellow metal typically moves upward in times of immense geopolitical turmoil.
Yet, that initial rush of capital into the precious metal following Russia’s wanton action against its peaceful neighbor was short-lived despite coinciding with a near unprecedented rise in inflation and a zero-growth economy in the US.
The next logical question is why...
One key reason is the relative strength of the US dollar so far in 2022.
As noted... inflation, recession, and geopolitical tensions are all positives for the price of gold.
But a strong US dollar is negative for the yellow metal since a strong greenback relative to other currencies makes it more expensive for foreign buyers to purchase US dollar-denominated gold.
That’s the exact scenario we watched play out in Q2 and Q3... but a seachange is coming — and it’s going to be very, very bullish for the yellow metal and select gold mining shares.
Currently, the US Dollar Index — which tracks the value of the greenback relative to the euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona — is at a 20-year high.
Part of the dollar’s relative strength in 2022 has been due to the US Federal Reserve aggressively raising interest rates to combat inflation — and to a lesser extent to stave off recession — since high interest rates encourage foreign investment in US Treasuries.
In fact, gold is hitting record highs in Turkish lira, Argentine peso, Sudanese pound, Sri Lanken rupee and several other currencies.
It’s only a short matter of time before gold does the same in US dollars as the Fed makes a sharp, predictable reversal to a softening stance due to the rising costs of servicing the federal debt in a higher-interest-rate environment.
As a result of the easy-money policies of the Fed since the great financial crisis of 2008, the federal debt — now above $30 trillion — has ballooned to unsustainable levels of 130% to 135% of GDP.
Already, with Powell & Co. raising the federal funds rate at its fastest pace in history, the cost of financing the debt has soared to a hyperbolic $600 billion a year — and that figure could soon eclipse $1 trillion if the Fed continues on its current rate hike trajectory.
We mentioned that the Fed’s primary goal with its current aggressive rate hike stance is to rein in inflation at any cost… even going so far as to say “some pain” is on the horizon for households and businesses.
Yet, even if mildly successful at cooling consumer prices to some degree, the US economy is still going to have lingering inflation around 5% to 6% over the next several quarters no matter how aggressive the Fed gets.
Fed Chairman, Jerome H. Powell
That reality — along with Powell & Co. ultimately capitulating to the fact that the size of the debt renders it powerless to get inflation back to its “normal” target range of 2% to 3% — is going to result in a market environment that’s overly bearish for the broader indices... but exceedingly bullish for gold and gold stocks.
The next bullish signal for gold will likely be when the Fed makes that inevitable pivot back to a lower interest rate stance… and that could happen as early as Q4 of this year as the US economy is now teetering on the brink of three consecutive quarters of negative growth.
Another key point few are talking about is the fact that the federal debt is now close to 4X what it was during the Fed’s last rate hike cycle back in 2015. Hence, the Fed has built what amounts to a financial house of cards that’s essentially going to force a pivot back to a softening stance.
That about-face will likely coincide with a sustained rush into gold — with silver in-tow — as investors seek to protect the purchasing power of their wealth as the Fed’s house of cards collapses.
Equally important in the gold argument is that, as the yellow metal rises, the share prices of well-positioned precious metals mining equities will outperform the broader indices by a large degree — including the price-percentage gains in the precious metals themselves.
That makes now an opportune time to be allocating a portion of one’s investment capital into the gold sector as those aforementioned bullish indicators come squarely into play.
Our own Nick Hodge just launched his brand-new video premiere on an under-the-radar junior gold firm that’s drilling now and could soon deliver the type of spectacular gains that are only possible in the junior gold space.
It’s called, “America’s Next Biggest Gold Mine.”
It was filmed on-location at the mine!
And you can check it out for yourself right here.
Editor, Daily Profit Cycle