When the Stars Align
Three Signs that the Gold Price will Soar
These are volatile times for gold but in a good way. In a single day on 24th February, the price broke out from $1920 per oz. to over $1970, and then plunged back down to around $1920. The next day, it fell further to $1880, and then came back up to $1920. It moved up and down since then, and yesterday, Friday, 4th March, it closed nearly back at $1970.
It shows a renewed interest in gold (and traders merrily taking profit). But why not? With inflation on the rise and tensions between East and West, people are looking for a safe place to keep their cash. And among the safe places is gold.
This year, 2022, seems to be the year that gold will soar to new heights. Some predict $2500 by the end of the year, some $2700 and some over $3000. To understand why gold would soar, we should look at the three signs that, if appear together, makes it almost a sure thing.
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Here are the three signs that indicate the gold price will soar.
Prices Rise Everywhere
I wonder if there is any need to say that inflation is high today. I mean, everyone must have already noticed and talked about it. It’s practically in the air. We can breathe it, smell it. It is obvious on the price tags of items in the supermarket or store.
Inflation has become prevalent everywhere. In the US, the official annual inflation rate for last month (February) is 7.5%. That’s the official figure. Unofficially, it is 15% — based on how the inflation rate was previously calculated before the US government got creative.
When prices increase 2% a year, it’s hardly noticeable, because something that was $10 last year would only be $10.20 today. But when the price increase is 15%, the thing that was $10 is now $11.50. We do notice it.
If you have spare cash, you’d want to keep it where the value wouldn’t fall. Gold and silver would be among your choices. Alternatives are government bonds and, arguably, risk assets such as equities and crypto. But they are not all the same.
This is the first and foremost sign that the gold price will soar: Inflation. I would say that this is the prerequisite for the other two signs because the other two signs simply nail in the fact that the inflation situation is real.
Something else that you could do is to buy in advance the necessities that you know you’ll need before their prices go up. This is what I am doing. I just make sure the items do not expire before I use them.
Inflation Overtakes Bonds
The thing I used to find confusing about bonds is the difference between price and yield. To clarify: The price is the cash amount you pay at the time you buy the bond; the yield is the profit you would make from the amount promised on the bond, at the time promised on the bond, possibly many years in the future. The yield is commonly calculated as an annual percentage rate. So the cheaper the bond, the more the yield.
Governments issue bonds when they need money. People, banks and countries buy them. Among government bonds, the US Treasury bond is arguably the most risk-free. The US Dollar is the world’s reserve currency, and almost every country in the world has US Dollars. So it is actually convenient for the countries to use their spare US Dollars to buy US Treasury bonds.
Things get a little different in times of inflation. Last month, the official US inflation rate was 7.5% but the bond yield was only around 2%. That means you lose value holding the bonds. Any smart person, bank or country would see this, and so they start looking for alternatives.
Not everyone is selling their bonds. The US inflation rate was 7.5% only in the month of February. Only one month. There is hope that, in March, the inflation rate would be back down at 2%. Why sell the bonds lower than the price they were bought? Why not wait for the next inflation figure?
The next US Consumer Price Index (CPI) figure will be out on the 10th of March. I’m betting it would show US inflation at at least 8%, but who knows?
Whatever the inflation rate, the yields need to race against it. If they lag behind, then the bonds won’t be as attractive as before. Gold is an alternative to bonds as a safe haven. If bonds are placed aside, we would have the second sign that the gold price will soar.
Risk Assets Become Riskier
With great risk comes great reward. Recently, though, investors in stocks and crypto were getting great rewards at seemingly no risk. Apple, Tesla and Netflix were going up and up seemingly to no end. Bitcoin was going to the moon. Those were the good times. It lasted about two years.
Politicians may say something else, but economists say that inflation is caused by an increase in the money supply, also simply known as “money printing”. Small amounts may lead to an inflation of 2%, but really large amounts take it to 15%.
You may not have felt it when governments started printing money in a frenzy two years ago. That’s because it takes up to two years for the inflation monster to rear its head.
All that new money kept on going to banks and institutions and were made cheaply available to borrowers who in turn invested them in stocks, crypto and other investment products. The US debt is now $3 trillion. I don’t know how much of it reached the markets, but even if it were 20%, that’s $600 billion. (If you know, please write it in the comments.)
Now that inflation is here, governments are making money expensive again by raising the interest rates. As I am writing this, the US Fed hasn’t yet raised the US interest rates, but borrowers are already pulling back the money from the markets. The result? Falling stock and crypto prices.
With money leaving the markets, it’s generally not a good time to invest there. You can, if you know exactly which stock or commodity to buy. Possibly, some smart people had been aware of how the Ukraine conflict would turn out and had bought oil futures at $80 per barrel. The price went up to almost $120 per barrel.
Shaky markets with riskier risk assets is the third sign for gold to soar. Money has to flow somewhere, and if not bonds and risk assets, gold.
These Three Signs are Like Stars
When they align, the night becomes magical. The direction is clear. Everything points to gold.
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A final note: Some might say that geopolitical conflict is a sign that the gold price would soar. It’s true. The gold price goes up when there is a major conflict. But I hesitate to include it as a sign because conflicts are not usually prevalent. Once the panic dissipates, the gold price comes back down. It’s inflation that hangs relentlessly over you like a stalker, even when you are calm.
