Jim Cramer recently announced that he is advising investors to go from 10% portfolio gold to 5%. If that isn’t a buy signal for gold I don’t know what is. When certain analysts turn bearish on gold and silver, it is usually a sign that the bottom is near.
Since gold’s turnaround in August 2020, the fundamentals have got stronger; and they were pretty strong before. The narrative for gold’s decline has been twofold. The dollar strengthening, which is simply not true, and the other smokescreen has been the 10-year treasuries which I also do not believe for one second.
The dollar index when gold hit its highs some $400 above its current levels, is roughly what it is now at 93.300. And as for the treasury yields, well who wants a 2% yield when we all can see that inflation is going to be higher? These are short term traders that have bought the dip and as soon as the Fed cannot allow them to rise anymore (and this will be soon) then they will take profit and run for the hills. Cash and bonds in the current climate are quite literally, not going to be worth the paper they are written on.
We have seen in the past that gold can rally in sync with the US dollar, and also 10-year treasuries. There are proven periods of time when this has happened in the last few years. The dollar index is rising but the key here is it isn’t strengthening, it is just outperforming a basket of other currencies falling at a greater rate than the dollar. The markets have been riding the wave of optimism now for too long, and when reality kicks in that we are nowhere near the dizzy heights the stock market is currently reflecting, the Fed will have to step in. They cannot allow a strong dollar nor yields to continue rising.
Powell keeps taking about using “all the tools available”. At the moment his only tool is continuing the dovish stance and money printing. His last and final tool at the bottom of the box is yield curve control. Surely it is only a matter of time before these words are uttered. The result of this? Stocks will rally and bond yields will fall – why would you invest knowing there is a cap and inflation will outweigh it. Next, the expectation of inflation will rise causing real yields to fall at a faster rate than nominal yields. And what about the dollar? When the above plays out, it will drop like a stone. This will mean every macro and fundamental for precious metals will align. Last time that happened over a decade ago, gold rallied around 180% over the next few years and Silver rallied circa 485%.
So what will it take for gold to shine again? The simple answer lies with the Fed, and it isn’t so much if, it is more when.