A Definitive Month for Gold

The yellow metal traded up through various psychological resistance levels to end the month at a little above the $1,900 mark…

After having experienced a somewhat mixed beginning to the year, with falling prices from January to April, May was a far better period for gold and saw the price recover nicely, although it still remains well below its August 2020 peak. The yellow metal traded up through various psychological resistance levels to end the month at a little above the $1,900 mark, seemingly on its way back to the $2,000 plus heights it accomplished in August last year.

I had been tempted to lower my year-end forecast for the gold price during the yellow metal’s weak period, but the recent recovery may even now suggest that my prediction that gold could reach around $2,225 before the end of the current calendar year (a forecast made just before Christmas 2020 on the sharpspixley.com website) may even be looking on the conservative side.

Precious metals opened the new month in Asia and Europe on a positive note, but were beginning to fade a little as the morning progressed. We will need to wait as the day advances and North American markets open, to see if $1,900 gold and $28 silver now becomes a base leading to another leg up for prices. At the moment the portents are positive, although the next leg up towards $1,950 for gold and $29 silver may be a little slower to achieve.

There are various positives for precious metals at play here, but pride of place may well be the growing expectation that the US Federal Reserve (the Fed) will be forced to start tapering its QE program, and perhaps start to raise interest rates. This would be in order to try and combat inflation which some commentators fear may be beginning to get out of hand as new COVID-19 infections continue to fall. The US recorded its lowest levels of new COVID-19 infections and deaths for about a year or more over the long weekend, although statistics recorded over the Memorial Day holiday may understate the true position.

Regarding statistics, though, it should be recognized that the Fed uses an inflation measure for its calculations which comes up with a potentially far lower inflation rate than the Consumer Price Index (CPI) which is the rate which most consumers will recognize as bearing the closest to what they might encounter in their own experience. The CPI is also the rate that tends to be seized on by the media. Latest CPI figures are heading towards an annual inflation rate of perhaps 6% – well in excess of the Fed target rate of around 2%. The Fed, though, uses a measure called the Personal Consumption Expenditures price index (the PCE).

An informative article on the NASDAQ website explains the PCE roughly thus: While the Consumer Price Index (CPI) looks at what people are buying, PCE looks at what businesses are selling. It is claimed that the PCE tends to capture a broader picture of spending and contemplates substitution among goods when something gets more expensive – so, for example, if the price of bananas goes up, it takes into account that some people will start buying apples instead. PCE doesn’t just measure people’s out-of-pocket costs, for example for big expenditures for healthcare, it will also take into account what Medicare is contributing.

As a result of the different way of calculating inflation, the PCE can come in several points lower than the CPI. The Fed considers the PCE a more accurate way of measuring real inflationary trends – hence its view that any upwards blip in inflation is only transient – and the utilization of this measure will thus give it more leeway in sticking to its average inflation target of 2% without seeing the necessity to taper QE, or raise interest rates.

However, a continued high CPI rate will probably have the members of the Fed’s Federal Open Market Committee (FOMC), with its next meeting in just over 2 weeks’ time, at least ‘talking about talking about’ possible interest rate rises in a shorter timescale than it had previously been suggesting.

Given the Fed’s ever-cautious language in its post-FOMC meeting statements, any inference that such discussions may even be taking place would almost certainly be picked up by Fed-followers and affect markets accordingly. Thus any ensuing comments along these lines would probably drive the gold price higher, even if there is, in reality, no actual likelihood of any change in the Fed’s tack in the short to medium term.

The Fed, and its chair, Jay Powell, have been very clear that the central bank’s main priority is to bring US national unemployment down to its pre-pandemic level, and it considers that a continuation of its current low interest rate and significant QE policy is the best way of achieving this. Given that on its PCE inflation level calculations the Fed has been consistently comfortably undershooting its 2% inflation target, a period of accommodating plus 2% inflation to bring the average up to target, may well not be contrary to its near term policy. Ultra low to negative real interest rates are very much gold positive.

Meanwhile, other factors also appear to be moving in gold’s favor. Gold ETF sales have reversed to become deposits and there is at least anecdotal evidence that Central Bank buying may be picking up too. Early figures for Q1 new mined gold production suggest a downwards trend at long last – perhaps peak gold is already with us.

Momentum has seen the gold price rise more than 7% to its current level this month and, as mentioned above it moved up through what had been assumed to be various psychological barriers with apparent ease. There has been a bit of a stutter around the $1,900 level, but that seems now to have been overcome and there seems to be little to stop the price rising to $1,950 or higher, putting $2,000 gold back in sight, although there could be a temporary correction due to profit taking on the way to $1,950.

Indeed if gold manages a similar percentage increase to that achieved in May in June it could even hit $2,030 by the month end. This is perhaps unlikely. But if the yellow metal consolidates above $1,900 prior to moving a notch or two higher, then certainly the low $2,000s could be in the cards by the end of the summer.

by Lawrence Williams

Lawrence Williams

Lawrence (Lawrie) Williams is a highly regarded London-based writer and commentator on financial and political subjects, specializing in precious metals news and commentary. He graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London. He has contributed articles on precious metals to the Financial Times, Sharps Pixley, US Gold Bureau and Seeking Alpha among others.

This article can be viewed on the Rosland US website here.