Gold Prepares to Rally

It&rsquo s been a whole year since gold hit its all-time high near $2,060.

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Since then, the precious metal has been in a correction phase that has seen it, along with gold miners, remain range-bound.

But that may be about to end.

All the fundamentals that pushed gold above the $2,000 mark are not only present, they&rsquo re more entrenched. Inflation, ultra-low interest rates, government stimulus spending and, of course, the COVID-19 pandemic.

And what&rsquo s happened since then?

The US dollar index may have peaked at 93 after rallying on the back of the Fed&rsquo s slightly hawkish taper talk. But Powell just recently said the US had not reached &ldquo substantial further progress&rdquo in order to start curbing the Fed&rsquo s $120 billion monthly bond purchases.

Powell also repeated that raising interest rates was not even being considered yet. The likeliness rates will only rise more than two years from now, combined with persistent inflation, explains why real interest rates have continued falling.

Although a lot of the inflation talk was about how much lumber prices had soared, and recently dropped, the rest of the commodity complex has actually held very steady, with some components rising further. The expanding money supply and fiscal easing to support an economic recovery are deep-rooted. So I expect inflation, weakening currencies, and investors to shift towards assets that will offer protection in this kind of environment.

Remember, the Fed continues to say that recent high inflation is transitory, and they&rsquo ve been saying that they are willing to let inflation overshoot 2% for some time to average out to 2% over the longer term. They call this &ldquo symmetric&rdquo inflation targeting. And the European Central Bank has just announced it will drop its just-under 2% inflation target, and instead aim for &ldquo symmetric&rdquo inflation targeting as well. These are two major central banks saying they&rsquo re happy to let inflation run hot for some time.

Perhaps they&rsquo re considering that the U.S. Economy may not be as healthy as it appears. It expanded at a 6.5% annualized rate in Q2, but actually missed consensus forecasts of 8.4%, which is likely what caused the Fed to back off on the tapering talk. What&rsquo s more, consumer price inflation (CPI) forecasts have crept higher, with US levels expected to rise to 2.5% for 2022.

Sophisticated Investors Buying Gold

While many central planners continue to disparage gold, what they&rsquo re doing with their money is quite the opposite.

In May alone Thailand bought 46.7 tonnes in May, Turkey added 8.6 tonnes, Brazil bought 11.9 tonnes making for its first purchase since 2012. Kazakhstan bought 5.4 tonnes, Poland 1.9 tonnes, and India 0.9 tonnes.

Serbia&rsquo s National bank said, &ldquo Long term, gold is the most significant guardian and guarantor of protection against inflationary and other forms of financial risks.&rdquo President Aleksandar Vucic recently indicated the National Bank of Serbia was looking to up its holdings from 36.3 to 50 tonnes of gold.

Commenting on central bank buying James Steel, chief precious metals analyst at HSBC said, &ldquo If a central bank is looking at diversifying, gold is a marvelous way of moving out of the dollar without selecting another currency&rdquo .

Recent buying has likely been bolstered by economic recovery and higher oil prices, encouraging emerging market nations to boost their gold holdings. The latest estimates show a trend in gold buying from central banks as they increasingly look to diversify their reserves.

Akash Doshi, along with other Citigroup analysts, wrote in a report that if the economy continues to gain steam, central bank buying might reach as high as 1,000 tonnes. That would be very impactful, and would represent over 20% of the annual 4,500 tonne gold supply.

This mindset is even permeating through to actual government-level treasury management. The state of Idaho recently passed House Bill 7, the Idaho Sound Money Reserves Bill, with overwhelming support. The Bill, to be heard in the Senate, would permit &ndash but not require &ndash the State Treasurer to hold some portion of state funds in physical gold and  silver  to help secure state assets against the risks of inflation and financial turmoil and/or to achieve capital gains as measured in Federal Reserve Notes.