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July 29, 2020 | Gold Goes Mainstream, New York Times Edition

John is author or co-author of five books, including of The Money Bubble, The Collapse of the Dollar and How to Profit From It, Clean Money: Picking Winners in the Green-Tech Boom and How to Profit from the Coming Real Estate Bust. A former Wall Street analyst and featured columnist with TheStreet.com, he currently writes for CFA Magazine.

There’s a stage in precious metals bull markets where even the least-interested mainstream media outlets feel compelled to acknowledge that something big is happening.

This helps prolong the uptrend by bringing gold and silver to the attention of people who are either unaware of the metals as investments or aware but in need of convincing.

The New York Times just published a great example of this type of article, which begins like this:

New Gold Rush Pushes Price to Record Highs

Something shiny and bright is beckoning investors accustomed to the gloomy days of 2020: gold.

In recent days, gold prices have hit record highs. For the year, gold is up 27 percent, a performance that puts it ahead of most stock, bond and commodity markets.

On Monday, the price of gold futures on the New York Mercantile Exchange rose 1.8 percent to more than $1,931 an ounce. Investors last week had already pushed gold prices past the record last set in August 2011.

Gold New York Times

Gold might seem out of date in a modern investing portfolio, but several developments — all tied to the coronavirus — have banded together to juice demand.

Note the grudging tone: “Gold might seem out of date in a modern investment portfolio…” and “several developments – all tied to the coronavirus…”

There probably isn’t a single gold-bug working at the Times, so it’s no surprise that their reporting contains such qualifiers and disclaimers.

But the rest of the article is fairly accurate and complete. Which is also not a surprise. The Times, for all its perspective problems, continues to attract talented reporters. And this one, Matt Phillips, got the general story very right. Here’s more:

The pandemic has pushed the global economy into one of the sharpest downturns on record. The International Monetary Fund predicts that this year, the world economy will shrink by nearly 5 percent. The plunge prompted central banks everywhere, most importantly the Federal Reserve, to pump hundreds of billions of dollars into financial markets, with the goal of propping up flailing economies.

But those billions aren’t coming from a storehouse; rather, central banks are creating fresh currency. The increase in money supply lowers interest rates and raises the amount of a particular currency, such as the dollar, in circulation. And over time, these moves can both increase inflation (lower interest rates typically spur economic activity) and weaken the value of a currency.

Right now, investors are taking all of that into account and determining that buying gold — which is traditionally considered an investment that holds its value over time — is the best thing they can do to shield themselves from inflation and weakening of so-called fiat, or paper, currencies. As a result, money flows into gold investments have surged in recent months as central banks have stepped up their fight against the downturn.

“It’s all monetary policy,” Mathieu Savary, a macroeconomic strategist with BCA Research, said of the recent rise in gold prices. “It’s very, very easy monetary policy as far as the eye can see and gold loves it.”

Those who traditionally invest in gold say it is a reliable but safe way to store cash. There are, however, other investments, such as government bonds — especially those issued by the United States Treasury — where jittery investors can stash their cash just as easily. And most of the time, they opt for bonds over gold, because bonds pay interest.

But something has happened over the last few months to change that gold-versus-bond calculus.

Since the Fed cut the short-term interest rates it controls to near zero, longer-term interest rates — also known as yields on government bonds — have also fallen to some of their lowest levels ever. The yield on the 10-year Treasury note was roughly 0.6 percent on Monday.

At the same time, because the Fed has created enormous amounts of new money, analysts say it could set the United States up for higher inflation down the road.

Investors are taking note of that possibility. In recent weeks, market measures of expected inflation, known as breakevens, have moved higher, and investors now expect inflation to average around 1.5 percent a year over the next 10 years. Since the 10-year Treasury note will return those investors only about 0.6 percent a year, that means investors who buy the 10-year note must essentially be comfortable with losing nearly 1 percent on that investment a year, after accounting for inflation. In the argot of the market, that means “real” or inflation-adjusted yields are negative.

Since not losing money — remember, gold is supposed to hold its value even if it pays no interest — is better than losing money, typically investors switch to gold from Treasuries when this happens.

“The only thing that matters in the gold price is the U.S. real yield,” said Natasha Kaneva, a precious metals analyst with JPMorgan Chase.

Inflows into gold exchange-traded funds — mutual-fund-like vehicles that are one of the easiest ways to buy gold — spiked after the Fed made major policy announcements in late March, during the worst of the outbreak. And the flood of cash to gold funds has continued.

According to the World Gold Council, a trade group, inflows into gold E.T.F.s hit a record in the first half of the year, as some $40 billion arrived. The heaviest inflows came from the United States, where nearly $30 billion in investor money poured into the gold funds.

Several analysts now expect gold prices will rise above $2,000 an ounce in the short term. In a note published last week, analysts at UBS said that negative real rates, a weaker dollar and continued geopolitical uncertainty — such as the tensions between China and the United States — will continue to support the price.

Because the Times tends to lead the mainstream media pack, lesser outlets around the country now have a green light to cover precious metals in a positive way, which will attract smaller but still consequential amounts of generalist money to the sector. And so it will go, as precious metals enter the really fun — that is,  parabolic — stage of their cycle.

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July 29th, 2020

Posted In: Dollar Collapse.com

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