Big Money Gets Gold, Do You?

Big Money Gets Gold, Do You?

Dear Reader,

Another day, another high.

Each morning this week my bleary eyes have been greeted with a new high in the gold price.

First it cracked US$2,000 per ounce on Monday.

Could we be looking at another new high before the trading week closes?


Although these latest moves are starting to look parabolic.

While long-time gold bugs are no doubt excited about the ordinary moves from gold in the last few weeks, try not to ‘buy in’ to the hype right now.

As I’ve pointed out here and here, after almost every new high comes a price correction.

The flip side of this is, the more new highs from gold, the more press attention it gets.

My morning web travels find many articles on gold from traditional mainstream rags.

Sure, they’re covering the newsworthy price movements, but they appear to be relying on some well-worn myths…

And in the process, they’re missing the point entirely.

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The inflation myth

Get used to a world of rising gold prices.

The yellow metal has officially moved into uncharted waters.

From here on in, we can speculate about certain future levels, but most of the key price targets are going to end in zeros.

Given it’s taken gold a whole five years to move a grand up, I don’t think it will take long to make the next leg. We could be looking at US$3,000 within 12–18 months. Less than half the time it took to move from US$1,000 to US$2,000.

Of course, it won’t get there in a straight line. Over the next few weeks, I’m expecting it to trend down to the 1800s and look for support there.

Nonetheless, each new high sees the mainstream wadding to catch up on the newsworthy event.

The problem is they’re misreading what’s really happening with gold.

Take this from the Australian Financial Review during the week:

Fears that the world could experience a sharp surge in inflation has in turn sparked a surge in investor interest in gold — which traditionally shines in periods of severe inflation. As a result, the gold price has hit a record high, and is now on the cusp of hitting $US2000 an ounce.


Unfortunately for the gold bulls, the velocity is likely to drop sharply during a pandemic, as falling confidence causes people’s willingness to spend money to wilt.

We’ll touch on the inflation next week.

However, inflation expectations aren’t what’s driving gold.

Rather it’s a crutch of analysis for people who don’t understand what moves the metal.

Gold doesn’t have a simple relationship with anything. It can have an inverse and direct relationship with many things.

Moving with oil is one. Movements on the political backdrop is another. As is the US dollar. Soaring physical demand influences the amount of ‘longs’ in the futures market.

Sometimes the direct reason behind the rally is government stimulus. Sometimes the indirect reason is because governments haven’t pushed ahead with stimulus.

At times gold moves in tandem with these and at other times it diverges. Leaving many to scramble and look for answers.

This isn’t about picking a backdrop to suit the narrative I’m trying to tell; it’s about understanding the diversity of what impacts the gold price.

Using a fear of inflation as a driver of gold prices misses the spot.

In fact, my friend Jordan Eliseo, manager of investments at the Perth Mint, is working to end this myth behind gold. Writing for Livewire recently:

As you can see, despite some of the lowest average inflation rates on record during the first two decades of the new millennium, the gold price has soared. If gold relied on high rates of inflation to perform well, then the price should have fallen for much of the last 20 years.

Instead it has gone up by almost 500%, with the yellow metal outperforming most mainstream asset classes over this period. This tells us conclusively that the idea that gold only does well during periods of high inflation is a myth.

Gold versus inflation

Port Phillip Publishing

Source: Perth Mint; Reuters; St Louis Fed; Live Wire

[Click to open in a new window]

Too often analysts claim that gold only performs during periods of high inflation, and therefore the absence of inflation means the gold price should fall.

Yet as Jordan’s chart points out, the yellow metal has significantly rallied through historical periods of low inflation.

It’s not that inflation isn’t a reason for gold to rally, it’s that it’s not the only thing driving gold prices higher.

Think of gold like this.

Inflation — high or low — is only part of the picture.

Gold is one of the few exits from central banks devaluing currencies. Their interference isn’t going to end anytime soon. Meaning the yellow metal is going to soar to new highs not thought possible.


Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia