Roundup: Fed Props up Gold Prices (Again)

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy.

Bullion.Directory precious metals analysis 31 August, 2020
By Peter Reagan
Financial Market Strategist at Birch Gold Group

Gold jumps as Federal Reserve strengthens inflation expectations

Most of the time, the policies of the Federal Reserve and other central banks tend to act as some of the most important drivers of gold prices. In particular, the threat of inflation and a lack of bond yields are what has consistently driven investors to gold and allowed it to surge past $2,000 earlier this year.

Keeping this in mind, it should come as no surprise that gold jumped to $1,973 during Friday’s trading session following Fed Chair Jerome Powell’s announcement that the central bank might let inflation run past its long-held target of 2%.

This reignited inflationary concerns, especially in the aftermath of the largest monetary stimulus ever issued. Furthermore, the Fed is likely opting to let inflation run higher to maintain its zero-rates policy, yet another powerful boon for gold on its own.

As New Street Advisors founder Delano Saporu pointed out, any investor looking for a source of safe returns or merely an inflation hedge is bound to take an interest in gold. While Saporu singled out Fed policies as an expected tailwind for gold, Laffer Tengler Investments’ chief investment officer Nancy Tengler sees plenty of other reasons for the metal to keep going up.

Tengler noted that negative real interest rates, a very risky stock market and ballooning government debt should all keep investors close to gold, especially as the latter issue grows worse amid efforts to stimulate the economy in the wake of the pandemic. Having expected a pullback after gold passed $2,000, Tengler added that investors should look out for similar dips and treat them as entry points into a very solid market.
 

Latest report says that the gold market could see $2 to $3 trillion more poured into it

According to latest research by Toronto-based precious metals asset management firm Sprott, the after-effects of the pandemic could cause investors to seriously reconsider their gold positions. Despite the metal’s outperformance this year, Sprott’s team, like numerous other analysts, has taken note that investors remain underweight on gold.

Their report estimates that only 20% of investors make a portfolio allocation to gold, and that the allocation has thus far lingered around the 1%-2% level in the majority of cases.

Yet, as gold’s price movements this year have shown, investors are beginning to reassess what gold can do for them.

The slew of lockdowns across the world has caused long-term damage to various economies, with the U.S. being just one example. These economies will need to be reinvigorated through increased government spending, which will be facilitated by massive government borrowing.

Since most countries are already dealing with overwhelming debt levels, Sprott believes more reckless spending will turn investors to caution and establish a view where gold is a necessity, rather than an option.

Driven by a desire to both reduce risk and preserve their purchasing power, Sprott expects the overall percentage of investors that own gold to reach 40%, and the average allocation to increase to 3%-5%. This would translate to another $2 to $3 trillion being poured into the gold market over the next few years, accompanied by a price increase to a range between $2,500 and $3,000.

With their latest report, Sprott’s team has now joined many other forecasters who expect gold’s price to reach similar levels in the near future.
 

Despite all-time highs, a deeper analysis shows that gold remains undervalued

With gold setting a new all-time high and silver moving accordingly, some have begun to interpret the metal’s valuations as steep.

Compared to two years ago, when gold was sitting at a little over half its current price, they might be called that. Yet when one attempts to price gold in real terms, based on how the U.S. dollar has moved over the past decades, the $2,000 figure begins to look like a bargain.

In an attempt to do just that, Kitco’s Lobo Tiggre used data provided by ShadowStats.com’s John Williams. Instead of assessing gold in CPI-adjusted terms, Williams applied the way the Bureau of Labor Statistics (BLS) used to gauge inflation on gold’s price.

And, in those terms, gold reached $50,000 in 1980 when talking the greenback’s present-day value, with silver likewise climbing to $3,000.

For added perspective, Tiggre uses the idea of a 50-year average for both gold and silver starting from the year when gold was untethered from the greenback. Following the same inflation gauge that the BLS uses, gold’s 50-year average should sit at $9,612, with silver’s being perched at $238.

Valuations such as these are lofty, and though there are some forecasters willing to call for these prices, Tiggre is reluctant to do so.

Yet the analysis presents a definitive answer to the question of whether gold’s current price is too high, along with showing that gold has no shortage of room to move upwards when one considers its price in real terms.

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