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For Gold, It's Goldilocks Inflation

Commodities / Gold and Silver 2018 Feb 15, 2018 - 11:45 AM GMT

By: The_Gold_Report

Commodities

Rudi Fronk and Jim Anthony, cofounders of Seabridge Gold, delve into the question of whether inflation is good for gold.

Is inflation good for gold? It depends. If inflation provokes a hawkish Fed to raise rates faster than inflation, not so much. But if the Fed is worried about the stock and bond markets and therefore won't raise rates fast enough to keep pace with inflation, that's good for gold. And that's where we seem to be now.


Fear of inflation has been weighing on the bond market, helping to drive interest rates higher, and that's been a negative for the stock market. On February 14, we got a "hot" CPI number that confirmed the market's fears and the initial reaction was to sell stocks and gold, sending them lower, and the dollar caught a bid. That's the response you would expect from anticipation of a more hawkish Fed.

But then came the reversal and quickly. The dollar tanked, gold soared and the stock market mounted a comeback. However, the bond market also fell, pushing yields higher at the long end. That is going to put renewed pressure on stocks if the last few weeks tell us anything.

We now have two reasons to think interest rates are going higher. First, there is the late cycle stimulus to the economy from the Trump tax plan and budget, which are forecast to drive the annual budget deficit to a $1 trillion, double the recent past. This is a boost to spending without a commensurate increase in economic output because, as we all know, the government does not produce goods and services. This is inflationary and that appears to be the bond market's interpretation; the bond market has been under pressure since the tax plan was passed last December.

Second, the issuance of new debt will double to $1 trillion in 2018 while at the same time the Federal Reserve is scheduled to be selling assets (Treasuries and mortgage bonds) at an annual rate of $600 billion by October of this year. All this added supply is going to pressure rates higher.

Higher rates and a weaker dollar are not typical companions. Neither are higher rates and higher stock prices. But a weak dollar and a steeper yield curve are historically good for gold.

All considered, we could be brewing a perfect storm for gold. Let's see if gold can punch through the 2016 high around $1,370. If so, the game may be on. Gold could be the best game in town.

This article is the collaboration of Rudi Fronk and Jim Anthony, cofounders of Seabridge Gold, and reflects the thinking that has helped make them successful gold investors. Rudi is the current Chairman and CEO of Seabridge and Jim is one of its largest shareholders. Disclaimer: The authors are not registered or accredited as investment advisors. Information contained herein has been obtained from sources believed reliable but is not necessarily complete and accuracy is not guaranteed. Any securities mentioned on this site are not to be construed as investment or trading recommendations specifically for you. You must consult your own advisor for investment or trading advice. This article is for informational purposes only.

Disclosures:
1) Statements and opinions expressed are the opinions of Rudi Fronk and Jim Anthony and not of Streetwise Reports or its officers. The authors are wholly responsible for the validity of the statements. Streetwise Reports was not involved in any aspect of the content preparation. The authors were not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the authors to publish or syndicate this article.
2) Rudi Fronk and Jim Anthony: we, or members of our immediate household or family, own shares of the following companies mentioned in this article: Seabridge Gold. We personally are, or members of our immediate household or family are, paid by the following companies mentioned in this article: Seabridge Gold.
3) Seabridge Gold is a billboard sponsor of Streetwise Reports. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
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