Currently, there is a tense situation on the gold market. Dragmetall trades around $1,800 an ounce, but it's hard to predict where the course will go next. Some experts are confident that the yellow metal exchange rate will decline against the background of attractive stock assets and bitcoin for investment. Others predict an increase in gold quotes, citing a slowdown in economic growth in the leading powers and an increase in inflation.
Rick Rule, a leading expert in the natural resources and precious metals market, director of Sprott U.S. (USA), believes that the gold market is at the beginning of an upward trend. As a rule, the upward trend develops over a long time, passing through the stages of emergence, growth and attenuation. For example, in the last century, the growth of gold quotes began in 1971, and ended 11 years later - in 1981. The 21st century was marked by an 11-year period of a stormy rally in 2000-2011. If we consider the recent period of the history of the gold market, we can see that only 4 years have passed since the start of the upward trend in the precious metal exchange rate. Therefore, it cannot be said that the price of gold has already passed the peak point. In all likelihood, the upward trend is only at the beginning of its rise and it will have a long, 11-year development path, as it was in the past (if not more, given the unusual situation in the modern economy). Dragmetall has not yet overcome half of his growth path.
The gold exchange rate has grown almost 2 times in recent years - from 1000 to 1800 dollars. For comparison, the price of yellow metal during the upward trend in the 70-80s. increased 24 times - from 35 to 850 dollars. During the second upward trend, in the 2000s, its price increased only 6 times - from 256 to 1900 dollars. In the context of the yellow metal market, it is necessary to take into account the duration and scale of the upward trend.
According to the expert, when depositors are concerned about the purchasing power of their savings in traditional assets, including in currencies, then gold quotes are rising. If the population does not trust bank deposits and treasury bonds, then their choice falls on precious metal. What is this happening in the "treasurer" market? It should be noted that now there are many people who want to invest money in securities. The US government offers 10-year Treasury bonds with a yield of 1.25% per year, while the dollar loses its value at a rate of 2-5% per year. The depositor's capital in bonds will decrease by 4% per year over 10 years, taking into account a complex interest. In 10 years, the investor will receive about a third of the capital that was invested in bonds. Soon it will become clear to all investors that the "treasurers" are not the best investment object.
Holders of deposit accounts in banks will also face inflation risks. According to a large-scale plan by the US Internal Revenue Service, bank accounts will be monitored for transfers of funds worth more than $600. The purpose of the plan is to identify wealthy tax evaders. The Tax Service's intentions are good, however, surveillance can also lead to violations of the rights of many Americans who did not commit tax fraud. President Joe Biden announced the start of the "Great Reset" of the banking system. He appointed Saule Omarov to the post of head of the Office of the Controller of Money Circulation in order to "end the old banking system." Saule Tarihovna Omarova is an American scientist, professor of banking law at Cornell University. She advocates a socialized banking system in which deposits of private banks fall under the direct control of the central bank in certain conditions. The new banking regime was called "FedAccounts." Accounts are likely to be denominated in "FedCoin," the digital currency of the central bank, to ensure more effective tracking and control of citizens' financial transactions. Developments in the US banking sector indicate the danger of a financial crisis and the possible withdrawal of a decent amount of money from the bank accounts of a fairly large number of depositors. Americans would rather redirect this money to physical assets - precious metals, which are the best form of risk insurance. Gold in physical form is the material embodiment of money that protects fiat currencies from the upcoming collapse.
What will contribute to the growth of the gold exchange rate?
The policy of quantitative easing by the Fed and other leading Central Banks will make investors think about gold. The State issues banknotes on an unprecedented scale. The budget is filled with "inefficient" money, if you consider it from the point of view of purchasing power. The minutes of the last Fed meeting indicate that a reduction in monthly purchases of bonds (which amounted to $120 billion) may begin in November. This is likely to happen as the Fed tries to maintain public confidence in its inflation strategy.
The volume of public debt and budget deficits in the United States inspires serious concerns. At the federal level, the authorities owed $29 trillion. According to the US Accounts Chamber, the net present value of the entire social insurance system exceeds $120 trillion. That's a lot! This debt is serviced using national income, which is calculated as follows: the amount of taxes and charges minus expenses. In turn, national income comes out with a shortage of $4 trillion per year. This gap in budget funding is extremely difficult to narrow.
The total value of all precious metals and related assets in the United States is only 0.5% of the total savings and investment assets. The share of gold and silver over the past 30 years has grown from 1.5% to 2%. Currently, there is every reason to talk about the beginning of an upward trend in the gold market. This will be facilitated by inflation, quantitative easing policies, high debt, negative interest rates and a fall in the dollar index.
Dragmetall is an asset that protects savings from inflation. The US Department of Labor reported that in September of this year, the inflation rate rose to a 13-year high of 5.4%. A month earlier, this figure was 5.3%. This is the sharpest monthly increase in history. Wholesale price inflation increased by 8.6% compared to last year. This circumstance can lead to a decrease in corporate income and, as a result, will harm stock prices. In this scenario, gold will become a more attractive asset for investors. With the onset of winter, the economic situation of Americans is likely to worsen. The Energy Information Administration (US) predicts that heating bills for American households will increase by 50% compared to last year. Energy prices have been rising steadily over the past few months. According to the International Energy Agency, the global energy crisis will increase oil demand in the amount of half a million barrels per day, as well as accelerate inflation and slow economic recovery from the consequences of the pandemic. If the cost of energy continues to rise, inflationary pressure will increase, which will lead to a decrease in business activity and a slowdown in the pace of economic recovery.
As you know, the yellow metal exchange rate is expressed in American currency. Consequently, a weaker dollar plays into the hands of precious metal. Curtailing the Fed's quantitative easing program could lead to higher bond yields in the coming months and strengthen the dollar. However, the US central bank is unlikely to raise interest rates in the medium term. Negative interest rates are another circumstance that inspires bad thoughts about the future of the US currency. Under such conditions, banks issue interest-free loans. In addition, financial institutions now pay customers for taking out a loan. If there is no significant increase in the dollar, then the yellow metal will become a sought-after asset. If the Fed does increase interest rates to a positive level, then the gold exchange rate will suffer. However, this is unlikely to happen.
India supports gold
The season of weddings and holidays in India is one of the main reasons for the rise in prices for yellow metal. The country is the leader in gold consumption. In 2020, holidays in India were not held due to the pandemic. Therefore, last year the volume of gold purchases decreased greatly. Indians now catch up on lost opportunities: magnificently celebrate significant dates and buy jewelry from precious metal. Now the country is successfully conducting a campaign to vaccinate the population, which means that the pandemic is under relative control.
In general, the precious metal exchange rate suffers from the rally of the stock market and the American currency. These strong gold competitors still have attractiveness for investors. However, based on the geoeconomic situation, everything can change dramatically in the medium term, up to the explosion of "financial bubbles."