Is Gold An Inflation Hedge Again?

1. Is Gold An Inflation Hedge Again?

2. Points To Be Discussed Today:
• Gold Agains’t Spiraling Inflation
• Gold Strikes Back
• Inflation Hasn’t Been This Hot Since 1990
• All That Matters For Gold Is Real Yields
• The Bull Argument Is Favorable
• Goldilocks Environment For Gold
• Gold Inverse Head & Shoulders

3. Gold Agains’t Spiraling Inflation
• Gold hasn’t provided much protection against
spiraling inflation this year, but things are finally
changing.
• With traders looking for inflation hedges, rising
geopolitical tensions, and favorable seasonals,
this party could keep going for a few months.
• Sadly though, it may prove to be a bear market
rally as a slowdown in inflation and rising interest
rates next year ultimately take the shine off the
precious metal.

4. Gold Strikes Back
• For centuries, gold has been the supreme place
to hide whenever there was instability in the
world or inflation got out of hand.
• But in this crisis, it didn’t really behave as an
inflation hedge.
• Every time inflation surged, gold prices got
smashed.
• The logic was that central banks would be forced
to fight soaring inflation by raising interest rates,
which is negative for bullion.

5. Inflation Hasn’t Been This Hot Since 1990

6. Gold Still Moved Higher
• That pattern finally broke last week.
• US inflation accelerated to the fastest pace in
three decades, propelling the dollar and bond
yields much higher as investors priced in faster
rate increases by the Fed - but gold still moved
higher.
• The simple way of reading this is that bullion is
becoming an inflation hedge again.
• To be more precise, the precious metal is
benefiting from the weakness in ‘real’ Treasury
yields.

7. Real Yields Matter Most
• The US Treasury issues bonds called Inflation-
Protected Securities.
• These bonds are linked to the inflation rate
and pay a higher coupon if inflation fires up,
essentially protecting the investor from any
inflationary spike.
• The return on these securities is called the
‘real’ yield.

8. All That Matters For Gold Is Real Yields

9. All That Matters For Gold Is Real Yields - I
• So this was a complicated way of saying yes,
gold is behaving like an inflation hedge again.
• But not because fund managers are suddenly
lining up to buy the metal per se.
• Rather, it is because real yields have fallen so
much as everyone rushes to buy inflation-
protected bonds, indirectly bringing gold back
in fashion.

10. What’s Next?
• The burning question now is whether this rally
can continue. It probably can, for a variety of
reasons.
• First and foremost, the inflation story could get
even spookier in the coming months.
• The supply chain doesn't seem to be getting
better, wages are firing up, and price pressures
seem to be broadening out into different sectors
of the US economy like rents and medical care.

11. What’s Next? - I
• That could fuel demand for inflation hedges
even further, keeping real rates pinned near
record lows.
• The Fed is still buying truckloads of those
inflation-protected bonds each month, even if
the pace of its purchases will slow down now
that the tapering process has commenced.

12. January Spell In Gold

13. Safe-haven Demand For Gold
• Geopolitical tensions have also intensified. Two
theaters deserve close attention - Taiwan and
Ukraine.
• For months now China has been conducting military
exercises around Taiwan, which it considers a runaway
province.
• Similarly, Russia has been amassing troops next to
Ukraine, leading America to warn an invasion may be
imminent.
• Neither is likely to escalate into actual war, but the risk
alone could be enough to boost safe-haven demand for
gold.

14. The Bull Argument Is Favorable
• The last leg of the bull argument is favorable
seasonality.
• Even though seasonal patterns shouldn’t
really work in ‘efficient’ markets, they
apparently work in gold, which has a history of
performing well in January.
• Bullion has gained in the last 8 out of 10
Januaries, and in recent years, traders seem to
be front running this pattern from December.

15. The Bull Argument Is Favorable- I
• But the big picture isn’t so bright
• Having said all that, it’s difficult to envision
any rally being sustained for long.
• Everything hinges on inflation staying
scorching hot, but there is a strong chance
that inflationary pressures will cool towards
the end of next year.

16. Funds Have Been Adding To Gold
Positions

17. Goldilocks Environment For Gold
• The chaos in supply chains will eventually subside, more
energy production is coming back online, and year-over-
year comparisons will become much tougher from April
onwards, artificially lowering the yearly CPI rate.
• And if inflation doesn’t cool by itself, central banks will raise
rates enough to bring it down.
• In other words, this is the goldilocks environment for gold.
It could persist for a while longer, but heading into the
middle of next year, all bets are off.
• Real yields can’t stay this depressed forever with central
banks raising rates.
• Enjoy the party while it lasts, but don’t stick around too
long.

18. Gold Inverse Head & Shoulders

19. Short Term Sells On GOld

20. Is Gold An Inflation Hedge Again?

21. Thanks for listening
Is Gold An Inflation Hedge Again?