Gold may rise as market euphoria about economic recovery ends. While strong GDP growth is expected in the short term due to base effects and stimulus, optimism may be exaggerated, unemployment remains elevated, and risks remain from virus variants. Inflation is already above the Fed's 2% target according to official data, and likely even higher using alternative measures, but the Fed says price increases will be temporary. However, inflation could be more persistent given money supply increases, government spending, and pent-up demand as the economy reopens. Higher inflation would be bullish for gold as an inflation hedge.

1. Gold Bulls Enter The
Scene

2. Points To Be Covered Today:
• When Euphoria Ends, Gold Bulls Enter The Scene
• US Real GDP
• US Money Supply & Public Debt
• Inflation Knock-knock-knock In’ On Golden Door
• CPI & Core Inflation Rates
• Gold Fundamental Overview

3. When Euphoria Ends, Gold Bulls Enter The Scene
• Market participants are very optimistic about an economic recovery, but these
positive expectations may be exaggerated.
• The end of this euphoria should be good for gold.
• The optimism about the pace of economic recovery from the 2020 recession is
growing.
• The analysts race in upward revisions of GDP growth in the coming quarters.
• For example, the IMF – in the April 2021 edition of the World Economic
Outlook – expects at the moment that the US economic output will increase by
6.4% this year, compared to the 5.1% growth forecasted in January.
• The euphoric mood has some justification, of course.
• The vaccination is progressing, entrepreneurs are used to operating under
sanitary restrictions, economies are reopening and governments are spending
like crazy.
• At the same time, central banks are maintaining ultra-easy monetary policy,
keeping financial conditions loose.

4. When Euphoria Ends, Gold Bulls Enter The Scene -I
• Some economic data is consistent with strong rebounding, especially in manufacturing.
• For instance, the IHS Markit U.S. Manufacturing PMI Index posted 59.1 in March, up from
58.6 in February – being the second-highest value on record since May 2007 when data
collection began.
• Services are also recovering vigorously, as the IHS Markit US Services PMI
Index registered 60.4 in March, up from 59.8 in February. It’s the fastest rate of growth
since July 2014.
• Now, the question is how strong the current boom is and how long it is going to last. Well,
there is no need to argue that we will see a few strong quarters of GDP growth in the US
and other countries.
• But for me, the euphoria is exaggerated. You see, the current recovery is not surprising at
all. As the Great Lockdown plunged the world into a deep economic crisis, the Great
Unlocking is boosting the global economy.
• And there is the base effect. There was a low base in 2020, so the seemingly
impressive recovery in 2020 is partially merely a statistical phenomenon. Let’s illustrate
this effect.
• In Q2 2020, the real GDP plunged from $19,020 to $17,302 trillion or 9.03%year-over-
year, as the chart below shows.

5. US Real GDP

6. US Real GDP - I
• However, the rebound to the pre-recession level would imply the jump of
9.93%, almost one percentage higher! This is how the math works: when
you divide a numerator by a smaller denominator, you get a greater
percentage.
• So, it would be alarming if the recovery were not strong after one of the
deepest crises in history.
• Another issue that makes me more skeptical than most pundits is the fact
that the main reason behind economic growth upgrades is massive
fiscal stimulus.
• Uncle Sam injected more than 13 percent of the GDP in government
spending (only in 2020) that ballooned the fiscal deficits.
• Meanwhile, the Fed widened its balance sheet by almost $4 trillion. So, it
would be quite strange if we didn’t see impressive numbers in light of such
unprecedented inflows of monetary and fiscal liquidity

7. US Money Supply & Public Debt

8. Why The Price Of Gold Has Been Rebounding Recently, And
Why It Can Rise Even Further Later This Year
• First, the job recovery is more sluggish than the GDP recovery.
• The unemployment rate is still above the pre-pandemic level, while the labor
force participation stands significantly below the level seen in February 2020.
• Second, a full return to normal life will occur if vaccines remain effective. But
there is a tail risk of new variants of the virus, which could even be vaccine-
resistant.
• Third, history teaches us that when the pandemic ends, social unrest may
reemerge.
• After all, the epidemic left us with deepening inequalities and rising living costs.
• What does it all mean for the gold market? Well, the market euphoria about the
economic rebound is negative for gold. We have already seen how these
optimistic expectations freed the risk appetite and boosted economic confidence,
sending bond yields higher, but gold prices lower.

9. Why The Price Of Gold Has Been Rebounding Recently, And
Why It Can Rise Even Further Later This Year - I
• However, just as the doomsday scenarios created in the midst of the
epidemic were excessively negative, the current ones seem to be too
optimistic.
• I expect that with the year progressing, these expectations will soften or
shift to the medium-term, which could be more challenging.
• After all, the low base effect will disappear, and both the monetary
and fiscal policies will have declining marginal utility.
• At the same time, there will be an increased risk of high inflation, debt
crisis, stock market correction or even financial crisis.
• After all, the current levels of stock indices are partially caused not by
fundamentals, but by the elevating risk tolerance thanks to the central
banks standing behind most asset classes ready to intervene in case of
problems.

10. Inflation Knock-knock-knock In’ On
Golden Door
• Inflation is not coming. It is already here! Gold should benefit,
given that it could be higher and more lasting than the pundits
believe.
• “Knock, knock, knock in’ on heaven’s door”, so sing Bob Dylan
and Guns N’ Roses. Now, inflation is knocking on the golden
door.
• According to the BLS, the U.S. CPI inflation rate recorded a
monthly jump of 0.6% in March, while soaring 2.6% on an
annual basis. And the core inflation has also accelerated.

11. Inflation Has Significantly Surpassed
The Fed’s Target Of 2%

12. CPI & Core Inflation Rates
• And remember that this is what the official data shows, which rather underestimates the true
inflation.
• This is because of several issues, including hedonic quality adjustments, shifts in the composition of
the consumer baskets and methodological changes.
• It is enough to say that the rate of inflation calculated by the John Williams’ Shadow Government
Statistics that uses methodology from the 1980s is over 10% right now.
• There are some controversies about this alternate data, but I would like to focus on something else.
• The CPI doesn’t include houses (or other assets) into the consumer baskets, as they are treated as
investments. The index only takes rents into account.
• But homeowners don’t pay rents, so for them, the cost of shelter, which accounts for about one-
fourth of the overall CPI, is the implicit rent that owner-occupants would have to pay if they were
renting their homes.
• And this component rose just 2 percent in March, while the Case-Shiller Home Price Index, which
measures the actual house prices, soared more than 11% in January (the latest available data).
According to Wolf Street, if we had replaced the owners’ equivalent rent of primary residence with
the Case-Shiller Index, the CPI would have jumped 5.1 instead of 2.6%. The chart below shows the
difference between these two measures.

13. Owner’s Equivalent Rent & Case – Shiller
Home Indexes

14. Owner’s Equivalent Rent & Case – Shiller
Home Indexes - I
• Inflation has come, and even the official data – which can underestimate
the level of inflation that ordinary people deal with in their daily lives –
confirms this.
• If you’ve been buying food lately, you know what I mean. Now, the
question is whether this inflation will be temporary or more lasting.
• Powell, his colleagues and the pundits claim that higher inflation will only
be a temporary phenomenon caused by the base effect.
• The story goes like this: the CPI plunged in March 2020, which created a
lower base for today’s annual inflation rate.
• There is, of course, a grain of truth here. But let’s take a look at the chart
below. It shows the CPI, with both March 2020 (red line) and February
2020 (green line) as a base.
• As you can see, in the latter case the index jumped 2.3%. Yes, lower, but
not significantly lower than 2.6% when compared to March 2020.

15. CPI Index With February & March 2020 As Base

16. US Money Supply & FED’s Balance Sheet

17. US Money Supply & FED’s Balance Sheet - I
• They could also blame reckless fiscal policy. Growing
government spending, enabled by a rising pile of debts
monetized indirectly by the Fed, has headed for Main Street.
• This, combined with a jump in the broad money supply, is the
key change compared to the Great Recession when almost all
stimuli flowed into Wall Street and big corporations.
• Sure, some people use the received money to increase savings
and repay debts. But with the reopening economy, some of the
pent-up demand will be realized.
• Actually, many Americans have already started spending free
time traveling like crazy after being locked in homes for so long.

18. Conclusion
• All these reasons suggest that higher inflation could be more lasting than most of
the so-called experts believe (although the officially reported inflation doesn’t
have to show it).
• This is good news for the yellow metal. Higher inflation implies lower real interest
rates and stronger demand for gold as an inflation hedge.
• What is important here is that we have more inflationary pressure in the pipeline
exactly at the time when the Fed has become more tolerant of inflation.
• So, the combination of higher inflation with a passive central bank position
sounds bullish for gold.
• The key issue here is whether the markets believe that the Fed will allow for
higher inflation. So far, they have been skeptical, so the expectations of interest
rates hikes accumulated and the bond yields rallied.
• But it seems that the Fed has managed to convince the markets that it’s even
more incompetent than it is widely believed. If the distrust in the Fed strengthens,
gold should return to its upward trajectory from the last year.

19. Gold Fundamental Overview

20. Gold Bulls Enter The
Scene

21. THANKS FOR LISTENING
Gold Bulls Enter The Scene