Central Banks Keep Buying Metal

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Fitch, one of three major independent agencies that assess creditworthiness, cut their rating from the top level of AAA to a notch lower at AA+ on August 1^st.

The last time this happened was in 2011, and what’s weird about it is that gold actually plummeted by 50% after it from its then all-time high of $1,953 as markets began pricing in deflation.

On August 5^th, Standard & Poor’s then lowered their rating from AAA to AA+, and it meant something. Top officials on the hill didn’t brush it off or treat it with criticism, and that led markets to address the matter as the last part of the QE/money printing saga of the 2009-2011 reflation era.

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Courtesy: Zerohedge.com

You can clearly see why gold has been selling off recently, and I don’t expect this to change unless circumstances do.

Speaking with my younger brother over dinner a few days ago, he asked me about inflationary pressures and how they’re impacting gold, and I explained that it’s not as clear as many think.

This conversation happened at the rooftop restaurant, Cielo, at the Hotel de la Ville in Rome at the top of the Spanish Steps right next to where the new Mission Impossible movie has shot a number of car chase scenes.

It’s quite incredible to see Rome from above since you’re looking at thousands of years of history both from the age of the emperors and the height of the Catholic Church, and yet the one constant from the popes’ rule and that of Ceasar is the use of gold in regulating money supply.

As I explained to my brother, the chart shows gold’s highs and lows in a different manner when viewed from the lenses of real interest rates.

Gold’s price goes up in times of sustained declines in real interest rates, which are measured not by the nominal but by the actual yield after accounting for inflation.

As you can see above, real yields were north of 4% at the peak of the Dotcom bubble, a level that makes it difficult to justify any investment in gold from the perspective of Wall Street. If cash is earning 4%, why would I hold a non-yielding asset class?

Next up, in the 2000s, years of consecutive declines in real yields drove inflows to gold that birthed a bull market until 2007. As you can see, the panic years (2007-2009), which also saw deflation, were the times gold’s price fell, but the reflation from 2009 to 2011 when rates had gone negative caused gold’s surge to nearly $2,000/ounce, its peak for that period.

From the year 2000 to 2021, we see real rates falling from 4% to -1%, which has fueled gold’s ascent from $250/ounce to over $2,000/ounce.

Since bottoming in mid-2022, real yields are SURGING, and that is causing gold’s momentum to weaken for now.

The speculation is about what happens next because for gold to resume its upward trajectory, either the CPI goes up again (unlikely but possible) or the FED begins cutting rates (unlikely until the second quarter of 2024).

Selling gold, therefore, is out of the question because we’re clearly not at the end of a bull market but in a massive bear rally.

If the FED does not cut rates by March or May of 2024, it could be that gold enters a real bear market that will last a number of years, but we can’t make that assessment until we have more data.

Best Regards,

Lior Gantz
President, WealthResearchGroup.com