Gold Retakes Center Stage

Written by Jason Simpkins
Posted May 21, 2021

I can't believe I have to say this, but...

Investors should not follow breadcrumbs dropped by eccentric billionaires.

I don't care if it's Elon Musk or Warren Buffett.

Playing follow-the-leader is always a bad idea.

You've got to get out ahead of the market.

And that's what we've been doing with gold.

For months now, I've been harping on inflation and preaching gold as a profitable hedge.

In all that time, the yellow metal labored as other commodities took off.

We watched prices for things like lumber, copper, and oil surge.

We watched the herd stampede into fly-by-night cryptocurrencies.

And all the while we watched gold languish.

First, it fell from its August peak above $2,000 per ounce. And then it slid further through the winter.

But now what's this?

Gold Price One Year May 21

 

It looks as though a rebound is well underway.

Today, gold is at its highest level since January.

And why?

Because the buzz around cryptos has come to a screeching halt, and because the buzz around inflation (which I've been screaming about for the past year) has grown markedly louder.

Indeed, it's not just me anymore.

It's Forbes, Barron's, Bloomberg, MarketWatch, and investors all across the spectrum just now snapping out of their post-COVID euphoria.

They've all finally come to realize what I've been saying all along — just now coming to reckon with the obvious.

Prices are rising.

They've been rising.

Commodities are on fire. The housing market is overheating. The dollar is diving and bond yields are rising.

The Fed has miscalculated.

Jerome Powell and Co. thought they could stomach these higher prices while they patiently waited for employment to return to its pre-COVID levels.

But it's not working out that way.

The unemployment rate unexpectedly rose to 6.1% in April, which is roughly twice the pre-crisis level. Employers added just 266,000 new jobs, sharply missing Wall Street's expectations, which had expected to see a million or more created.

Meanwhile, the Consumer Price Index (CPI) jumped 4.2%, marking its fastest pace since 2008. A Dow Jones survey had expected just a 3.6% increase. And the month-to-month gain was 0.8%, topping the expected 0.2% in April.

The core CPI increased 3% from the same period in 2020 and 0.9% on a monthly basis. The respective estimates were 2.3% and 0.3%.

All of this points to something I predicted back in March, which is that the race to inflation would beat the race to full employment.

The Fed, of course, anticipated that might be a problem, which is why it pre-loaded excuses...

It continues to say it's "transitory." And now, it's going to over-emphasize the year-over-year baseline.

"It's not that prices are really rising," it'll strain to assure you — "it's that prices were so low during the pandemic that now it just looks like prices are rising."

It'll say this as if it's all just some magical illusion and in complete contradiction of a reality in which the prices for many things actually rose during the pandemic.

It's a fantasy that's also belied by the monthly inflation increases listed above.

Those increases show that prices aren't just rising rapidly in comparison to last year — they're soaring over figures established just last month.

The difference between March and May, though, is that investors now are starting to catch on. That's why we've seen so much market turbulence these past few weeks.

It's not just the crypto-crash undermining faith in the market (as many publications assert). It's institutional investors adjusting their positions to accommodate the likelihood that the Fed will have to act faster than anticipated.

Models that originally penciled in the first rate hike for 2023 are now being updated to reflect a potential rate increase in 2022. Analysts and investors who initially thought the Fed would keep rates locked down low until the second half of 2022 are now moving their forecasts up to the first half of 2022.

There's also a growing expectation that the Fed will have to act more quickly to curtail its bond purchases — especially in the mortgage market, where an obvious bubble has formed.

That's why the market plunged, and it's why gold is suddenly back in vogue.

Inflation, a wobbly market, and the startling realization that maybe cryptocurrency isn't the best dollar alternative available have all created a perfect storm for gold.

And that momentum will likely carry prices much, much higher.

Fight on,

Jason Simpkins Signature

Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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