Precious Metals: Patience Is Golden

Without growth in Western gold ETF holdings, the “decent but not spectacular” demand from China and India is not strong enough to move the gold price higher.

The SPDR (GLD-NYSE) fund gold holdings currently sit at about 843 tonnes. There has been very little change in the total tonnage for several months.  That’s neutral for the gold price.

Governments don’t like their citizens to own much gold. Restrictions they impose (like India’s import duty as a recent example) dampen demand enough so that the price rises very slowly most of the time.

Economic growth in China and India are increasing demand (the love trade) and mine supply is contracting, but the process is essentially “Chindian water torture” for investors who want to see the price skyrocket like it did in the late 1970s.

Investors that want “big action” in the gold price need to wait patiently for the US business cycle to peak. 

For the price of gold to really sizzle, the business cycle needs to have an inflationary peak. That hasn’t happened since the 1970s. Many gold price analysts have used overlap charts that suggest the gold market now is akin to the 1976-1978 period.

I look at fundamentals first, and charts second. From an inflationary standpoint, the US economy looks more akin to the late 1960s than the late 1970s.

The winds of inflation are beginning to blow, but they won’t become a hurricane for some time. Having said that, I’ve noted that the St. Louis Fed has calculated that the QE program would have sent the US inflation rate above 30% if money velocity had been at normal levels.

The Fed is projecting seven rate hikes over the next 24 months, and Goldman Sachs projects there could be nine. I’ve predicted there will be six.  Whatever the number turns out to be, it will likely be enough to move a lot of money into bank accounts.

As that happens, banks are likely to become very aggressive with new loans, because the fractional reserve banking system makes the potential reward worth the risk. The Fed’s new accelerated quantitative tightening program will also help push money into banks.