Paul Wong, CFA Market Strategist at Sprott (TSE: SII), believes the gold price is getting set to bounce off its relentless sub-$1800 level. Sprott is a key player in the mining and natural resource sector with its finger on the pulse of all things gold-related. Therefore, it's worth paying attention to.
Investor nerves are rattled
In August 2020, gold was on a roll, reaching a high of $2,067 per ounce (oz). But since then, it's languished in the shadows, eclipsed by the lure of promising new cryptocurrencies and the excitement of soaring stock prices.
On the sidelines, however, there's a constant band of gold believers never giving up on it returning to its former glory as the number one safe haven investment on the planet.
When Elon Musk dumped $10bn worth of Tesla (NASDAQ: TSLA) stock on the whim of a Twitter poll last month, the financial markets began to stutter. Then the arrival of the Omicron COVID variant rattled investor nerves much further, and markets took a turn for the worse.
If Omicron leads to more deaths or mutates into an even more dangerous strain, the world will be facing a serious dilemma. This threat makes gold more appealing.
Moreover, the Fed's plans to accelerate its tapering program is not conducive with soaring growth stocks, and investors are becoming noticeably nervous.
Topping this off are the louder and louder cries of inflation that can no longer be ignored. Particularly since Fed Chair Jerome Powell acknowledged that the inflation risk is persistently higher and broader.
When inflation erodes the value of fiat money, gold becomes increasingly attractive.
Why is the gold price suppressed?
However, gold bullion pricing took a dip in late November as the Fed announced plans to speed up its taper timeline. For tapering could lead to higher interest rates, reigning inflation concerns and making gold less appealing. That's because investors can earn higher returns from other sources when interest rates are high, as gold has a static value.
Sprott's market strategist also mentioned how the past three decades have marked a period of growth combined with low inflation and low macro-level volatility. This is known as the "great moderation," and technical indicators show it may be coming to an end.
While the Fed hopes to control inflation without impairing growth, it admits that interest rate hikes will have minimal effect on cost-push inflation. Thereby giving another signal to back up the higher gold price projection.
Cost-push inflation is the result of rising costs in wages and raw materials. It appears to be happening now, and there's nothing the central bank can do to reign it in. An unexpected surge in cost-push inflation is bad as it causes further bond volatility and uncertainty in the markets. When bonds are volatile, investors look to safe-haven assets like gold for some reassurance and stability.
For the past 20 years, bonds and equities have been negatively correlated, but market volatility indicates that's unlikely to continue. Before COVID's arrival, inflation was suppressed as the Fed targeted a 2% interest rate. Meanwhile, globalization lowered business costs. During this time, the Fed reacted to any unexpected market shocks, such as the great financial crash of 2008 and the COVID-19 pandemic, by printing money and cutting interest rates.
Unfortunately, the United States has since accumulated a ridiculous debt pile. Now, there's not much scope for more of the same money printing and little room for rescue rate cuts without risking severe consequences. Therefore, the obvious way out is raising interest rates.
However, while tapering is set to accelerate, high interest rates seem a long way off.
Economic fear raises interest in gold
Another bullish signal for gold came when the US consumer price index soared to 6.2% year-over-year in October, the highest figure in the past three decades since 1990. Consensus predicts November CPI data to come in at 6.8% on December 10.
Consumers have been complaining of higher food costs and higher rents. Meanwhile, energy costs are through the roof, and raw material pricing has seen outrageous price swings during the past year. All of this points to inflation.
The 'transitory' inflation mantra of the past nine months appears to have diminished. And it now looks as if inflation is here to stay for longer than initially anticipated.
In any case, if consumers believe inflation is here to stay, they'll demand higher wages to meet living expenses. Thus, creating a self-fulfilling prophecy and the continuation of cost-push inflation.
Whether it's temporary is an ongoing debate, but the fear of inflation is enough to keep gold from plummeting.
Asset bubbles everywhere
Meanwhile, there are several signs of asset bubbles throughout the financial markets, including crypto, digital land, and NFTs. This is not simply reminiscent of the dot com bubble, but potentially much worse. For never before has the S&P 500 been so intertwined with ordinary people's wealth via index funds and pension schemes.
Indeed, in the past six months, just four stocks have generated nearly 70% of the S&P 500's returns. Microsoft (NASDAQ: MSFT), Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA) and Google (Alphabet (NASDAQ: GOOGL)). Meanwhile, Tesla's inclusion in the S&P 500 has tipped the scales in an even more worrisome manner that is far too complex to go into here.
Looking back to 1997, a similar trend was occurring when Intel (NASDAQ: INTC) and Microsoft (again) ruled the roost, just before the market crashed spectacularly.
We may or may not be headed for a similar fate, but if enough investors believe it possible, again, gold becomes inherently attractive.
Volatility rules
Volatility is now increasing across bonds, equities and currencies, and it's ever-present in digital assets like crypto. This is yet another signal that gold will win out.
While the gold price rose in October and November, it's since fallen back below $1800. In the near-term, volatility is expected to prevail as exuberance and hope keep the markets lit.
Nevertheless, fear is creeping in, which is likely to boost gold sentiment in the coming weeks. Indeed, the World Gold Council said, in November, global gold ETFs enjoyed their first month of inflows since July. Furthermore, developed market central banks added gold to their reserves for the first time since 2013.
Alluding to technical analysis, Sprott's Wong believes the end of gold bullion's consolidation is near. And that's music to the ears of the gold bugs that have repeatedly had their predictions quashed over the past eighteen months.