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Gold price catalysts are piling up

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The catalysts popping up in favour of a breakout in the gold price are starting to pile up. Let’s take minute to review:

Pretty astounding that Liz Truss, who’s trust among her own party has fizzled dramatically since her remarkably pro-wealthy tax cuts caused the Bank of England to intervene with £20 billion in bond purchases over 2 weeks, is still leading the conservative party.

What is it with British conservatives who think they need to appease the Mayfair crowd with tax breaks? Do they not comprehend the correlation between a strong social safety net and public security? Evidently not. Such smug pride in misanthropic ignorance appears to be the undoing of conservatives in Canada, the US, the UK and elsewhere these days.

Bringing aboard Jeremy Hunt to replace fall guy Kwasi Kwarteng was obviously her only option, and Hunt promptly savaged Truss’s mini-budget and rather impressively broadcast a disarming set of sentiments that achieved the desired effect at the BOE, allowing the resumption of globally coordinated Quantitative Tightening.

It remains to be seen whether or not she can retain the leadership in a party that would look foolish having to replace their own prime minister three times within a single electoral cycle. There is much speculation that her longer term damage to the conservatives might have given the Labour Party a decisive win in the next election no matter what she does next.

Regardless, the certainty of a global recession, by definition of which we have already been in for the last 3 quarters, means the next elections nationally in the G7 are going to be about inflation and cost of living. Except in the US, where myopic obsession with identity trumps pesky existential trifles like interest rates and home foreclosures.

Italy and France are similarly waist-deep in right versus left, and the whole European continent is poised to freeze this winter, even as 35 LNG-laden boats linger offshore Spain due to a lack of re-gasification infrastructure in European ports.

The invasion of Ukraine by Russia is taking on wildly contrasting dimensions as Russia opts to deploy drones and missiles since its army’s combat quality has deteriorated significantly thanks to its hair-brained and somewhat desperate-appearing ‘mobilisation’ of untrained and largely uninterested troops. 

With the US dilly-dallying on the arrival of advanced anti-aircraft systems, the pendulum looks to be swinging Russia’s way for the time being.

One might argue that today’s market participants reveal the utter absence of historical context, as if ever there were a perfect storm for gold as geopolitical safe haven, now is it.

It now appears that the net driving influence on markets has become fundamentally deflationary, as there are no asset classes that haven’t experienced substantial deterioration in buy side interest, with the sole exception remaining short-interest futures.

In such an environment, historically speaking, the prices of assets begin to decouple from their longer term mean average value to the downside, which, among suave investors is a buyer’s paradise.

Interesting to note here that China and Russia have put together a pretty size-y collaboration of authoritarian-run nations to launch an alternative backed by gold to the US dollar for settlement of international trade transactions in energy and commodities.

With the Treasury now threatening to buy back its own bonds so the Fed can maintain the illusion of QT,  there are many fiscal drivers for gold now too.

To summarize, the convergence of catalysts that argue for the potential for a major breakout in gold include:

  • higher interest rates in an effort to combat;
  • runaway inflation, which shows no signs of slowing;
  • creeping geopolitical instability between east and west;
  • persistent global GDP deterioration, which we apparently don’t refer to as a recession anymore;
  • US dollar hyperinflation (which has not been slowed by QT at this point); and
  • growing awareness that crypto is not a safe haven asset class.

Original article: Gold price catalysts are piling up

©2022 Midas Letter. All Rights Reserved.


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