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Gold in Q3: Rising Yields Pressure the Metal, But Catalysts Build

Jeff Clark, Senior Analyst, 
OCT 5, 2021

The big story in Q3 was the sharp reversal in bond yields, along with a rising US dollar, both putting downward pressure on the gold price.

This quarterly report briefly examines the performance of gold and other major asset classes during the third quarter and year-to-date, along with a review of the conditions that could impact gold and silver in the final quarter of the year.

Gold in Q3: Price Softens

After rebounding in Q2, the gold price succumbed to the pressure of sharply rising Treasury yields in Q3, when the Fed began talking about tapering asset purchases.

Q3 Performance of Major Asset Classes

Commodities, along with oil and the US dollar, led the pack. Broad stock markets were weak. Silver basically crashed.

Gold’s inverse relationship to the dollar and yields held true last quarter.

Gold YTD: Q3 Pushes It Negative

Gold was flat on the year, until Q3 hit.

2021 YTD Performance

Oil, commodities and real estate are the clear leaders YTD. The broad stock markets are up on the year, and the USD and inflation remain elevated. Bitcoin (not shown) lost 40% in Q2 and gained it back in Q3, now up 51% on the year.

Gold and silver are currently down on the year. For those that wonder about palladium and platinum, they logged their fifth straight monthly decline, a result of the semiconductor shortage that’s curbed auto production. Palladium especially has suffered, recording its biggest monthly drop in 13 years in September.

Q4 looks to be intriguing: uncertainty remains surrounding inflation, central bank tapering, and lack of political progress on the U.S. debt ceiling and infrastructure bill.

How Does 2021 End?

We remain in unchartered territory. The world is still trying to exit a global pandemic, while high inflation and political discord persist.

This and more are some of factors that could impact economies and markets in the final quarter of 2021. Here’s what we’re watching that could impact the gold and silver markets, any one of which could serve as a spark.

Is Inflation Really Transitory? Core inflation rose 3.6% in August (most recent available) from a year ago, the biggest jump in more than 30 years, since May 1991. The Commerce Department blamed supply chain disruptions and unusually high demand for ongoing price pressures. The 24.9% increase in energy prices didn’t help, either.

The question, of course, is if high inflation proves transitory—or not. Fed Chairman Jerome Powell admitted that persistently high inflation readings are “frustrating.” White House economic adviser Jared Bernstein said inflation is “likely to stay elevated longer than previously expected.” And after its September meeting, the FOMC revised its estimate for the Personal Consumption Expenditure (PCE) inflation rate, now projecting it will come in at 4.2% for 2021, a sharp upward revision from June’s projection of 3.4%. Bottom line, the “transitory” message from the Fed is losing steam.

Some economists are also warning about the growing risk of stagflation—falling economic growth accompanied by high inflation. Economist Nouriel Roubini, who accurately predicted the 2008 financial crash, says global supply chain woes, along with high debt ratios and loose monetary and fiscal policies, threaten to turn “mild stagflation” into a stagflationary crisis. Stephen Roach, former Morgan Stanley Asia chairman, also says the U.S. faces a 1970s-style stagflation, partly due to the energy price spike and ongoing supply chains disruptions.

Persistent high inflation is present to the Euro zone as well. Consumer price inflation in the 19 countries hit 3.4% in September, up from 3% a month earlier, the highest reading since September 2008. High energy prices and supply bottlenecks are again blamed. It looks likely to jump higher still, as supply-chain disruptions are reported to be worsening. The ECB is sticking with the message that it will quickly pass, though ECB President Christine Lagarde publicly admitted to higher than expected inflation risks.

Yields: Treasury yields have spiked, mostly due to central banks announcing they may begin to ease monetary policies. Both the 10-year and 30-year saw their largest quarterly gain since March, and the two-year logged the largest three-quarter gain since 2018. The Bloomberg Global Aggregate Index, a benchmark for government and corporate debt, has lost 4.1% so far this year, the biggest slump for any such period since at least 1999. Whether central bankers actually begin to scale back bond buying remains to be seen, but Fed action will clearly have an impact on the markets including gold.

Debt Ceiling: As of this writing, no agreement has been reached on the debt ceiling. U.S. debt is now closing in on $29 trillion! Roughly $700 billion has been incurred since President Biden took office and chose Yellen to head the Treasury, and the budget deficit through the first 10 months of the fiscal year stood at a whopping $2.71 trillion.

With a potential default looming, Treasury Secretary Janet Yellen said she would like to see the power over debt limits taken away from Congress. A bill introduced in May would repeal the national debt ceiling, and when asked if she would support it, Yellen said “yes, I would.” A lack of resolution on the debt ceiling would have a tremendous impact on the markets, with gold serving as the ultimate hedge.

Housing: Rising home prices continue to pinch buyers. A recent University of Michigan consumer survey said buying conditions for housing are now at their lowest level since 1982.

Home prices, as measured by the S&P CoreLogic Case-Shiller National Home Price Index, rose a whopping 19.7% in the year ending July, the highest annual rate since the index began in 1987. Apartment rents in the U.S. were up 11.5% compared to last year, while some cities in Florida, Georgia and Washington saw increases of more than 25%. A reversal in the real estate market would push investors to gold.

Oil: The oil price normally falls when the U.S. dollar strengthens, but that correlation has not held up recently. Brent crude hit $80 a barrel last month, for the first time in almost three years. This pressures American exporters, as they’re hit with the double-whammy of higher fuel costs and a stronger dollar. How this plays out will continue to impact markets, including gold.

China: One of China’s largest real estate developers, Evergrande, has so far failed to address two bond interest payments. Its mountain of debt is a real concern; it admitted it could default if it cannot raise capital quickly. Some analysts say it could morph into a “Lehman Brothers moment” for the country. Mattie Bekink, China director of the Economist Intelligence Unit, admitted that “the impacts from a large default by Evergrande would be remarkable.”

Meanwhile, the world’s second-largest economy faces other concerns: a resurgence in COVID-19 cases, power rationing in major provinces, a slowing economy, and a fall in real estate sales and new constructions. All this while inflation remains stubbornly high. Gold could serve as an effective hedge to any significant fallout emanating from China.

Black Swans: Given the plethora of unresolved issues surrounding most economies, the current environment remains ripe for a significant, unforeseen event. Another shock to the global economy or markets would highlight gold’s hedging abilities.

The Gold and Silver Hedge

The circumstance of stubborn inflation, unresolved political conflicts, and elevated stock and real estate prices creates an ideal scenario for gold.

The most likely path ahead is one where gold continues to offer a meaningful and necessary hedge. Another set of record high prices in the next run seems highly likely.

About Jeff Clark

An active investor with a love of writing, Jeff Clark is a globally recognized authority on precious metals. As the son of an award-winning gold panner, with family-owned mining claims in California, Arizona, and Nevada, Jeff has deep roots in the industry. Jeff regularly speaks at precious metals conferences, serves on the board at Strategic Wealth Preservation in Grand Cayman, and provides exclusive analysis and market commentary to GoldSilver customers. Follow Jeff on Twitter @TheGoldAdvisor