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Gold's Bullish Fundamentals

Philharmonic Coin placed on top of gold bars

Over the past few weeks, we've tried often to remind you that the year 2020 is unfolding almost identically to the year 2019...at least in terms of COMEX precious metal prices. COMEX gold fell from early September to late December last year and then resumed its uptrend as the fundamental factors that had been driving price began to reassert themselves. The same thing is happening now.

If you need a refresher, here are two recent links on this topic:

And what are those "fundamental factors that have been driving price" for the past two years? Here are just a few...

Let's start with negative interest rates. You likely know how negative "real" rates are a key long-term correlation for gold prices. However, straight up negative nominal rates are the single most bullish factor ever created by man. Why? Because while it takes some additional thought and understanding to grasp the importance of inflation-adjusted interest rates, just about anyone can look at a -1.0% sovereign bond or bank rate and think that there must be a better deal out there somewhere. "Gold doesn't pay a dividend" sure beats the heck out of "negative interest".

Eric Pompboy tweet

Holger Tweet

But while we're at it, let's check on those inflation-adjusted or "real" rates. Market implied U.S. inflation expectations are at an 18-month high. This is why the TIP ETF is once again trading near its own all-time highs even though the 10-year treasury yield has bumped to 90 basis points.

Charlie Bilello

TIPs Bond ETF

Again, if you use the TIP as a proxy for expected real interest rates, you can see the clear correlation between this ETF and the price of COMEX gold. Shown below is a 15-year chart of COMEX gold in candlesticks and the TIP as a blue line. Be sure to note that for COMEX gold to "catch up", it will need a move of about 10% back toward the highs seen in August.

CHemke Chart

And then there's the U.S. dollar. If you measure it versus other fiat currency, its value has collapsed by 12% since the advent of QE∞ in late March.

CHemke Chart

But let's not just measure the dollar versus other fiat currency. Instead let's also look at it on an absolute supply basis. Consider this:

Sven Henrich

But it's not just the past twelve years that are at issue here. Instead, check the pace of devaluation since the Covid Crisis began. See these tweets from Sven Henrich and David Rosenberg:

Sven Henrich Tweet

David Rosenberg tweet

So look, there's a reason why things have bounced back so vigorously over the past week. Prices were slammed backward into the COMEX Dec20 expirations and now they are rushing to catch back up. Combine this with dip buyers and their fear-of-missing-out trade and you get the renewed rally that we've been expecting. While it is unlikely to be straight up from here, it's very likely that the worst is now behind us and every new chart hurdle that gets cleared will draw in more optimistic buying.

With gold and silver prices finally emerging from their own tempest, it seems fitting that we'd close with a quote from "The Tempest". After a strong rally followed by a multi-month consolidation, the precious metals are now resuming their uptrend based upon resoundingly bullish fundamentals.

The year 2020 has played out much like 2019, and 2021 will continue the trend. “What’s past is prologue.”

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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