International Forecaster Weekly

WITH INFLATION AND VOLATILITY STAYING HIGH, SOME EXPECT GOLD TO HIT $2,000 VERY FAST

After a trading day that saw the steepest drop in the S&P 500 since 2008, briefly dropping into correction territory with a big sell-off — and then saw it actually close UP 0.3% — the word that comes to mind, besides Whew, is Volatility.

A lot of it.

Since the beginning of the year, the CBOE VIX Volatility Index is up about 74% — having risen from a more modest 17.60 to 29.90 at the close today.

In fact, over the past two years, market volatility has more than doubled, and that is something precious metal investors should be paying attention to.

Without getting too technical, the VIX signals the level of fear or stress in the stock market — using the S&P 500 index as a proxy for the broad market — and thus is widely known as a “Fear Index.” 

The higher the VIX, the greater the level of fear and uncertainty in the market; levels above 30 indicate a lot of investor fear and enormous uncertainty.

Five years ago, Meera Shawn wrote in Market Realist, “Notably, we often see that an increase in volatility can lead to a rise in gold.” 

Other studies also confirm a positive correlation between the VIX and gold prices but are too detailed to summarize in this article (e.g., Gorbel & Jeribi 2021, Klein et al 2018, Bauer & Lucey 2010).

Guest Writer | January 26, 2022

By Dave Allen for Discount Gold & Silver

After a trading day that saw the steepest drop in the S&P 500 since 2008, briefly dropping into correction territory with a big sell-off — and then saw it actually close UP 0.3% — the word that comes to mind, besides Whew, is Volatility.

A lot of it.

Since the beginning of the year, the CBOE VIX Volatility Index is up about 74% — having risen from a more modest 17.60 to 29.90 at the close today.

In fact, over the past two years, market volatility has more than doubled, and that is something precious metal investors should be paying attention to.

Without getting too technical, the VIX signals the level of fear or stress in the stock market — using the S&P 500 index as a proxy for the broad market — and thus is widely known as a “Fear Index.” 

The higher the VIX, the greater the level of fear and uncertainty in the market; levels above 30 indicate a lot of investor fear and enormous uncertainty.

Five years ago, Meera Shawn wrote in Market Realist, “Notably, we often see that an increase in volatility can lead to a rise in gold.” 

Other studies also confirm a positive correlation between the VIX and gold prices but are too detailed to summarize in this article (e.g., Gorbel & Jeribi 2021, Klein et al 2018, Bauer & Lucey 2010).

$2,000 Gold Despite Fed Hikes?

This news comes as one senior market strategist envisions gold returning to $2,000 this year even as the Federal Reserve begins to reverse its Forever QE.

            George Milling-Stanley of State Street Global Advisors says that continued high inflation pressure means that real interest rates will remain in negative territory — despite 3 or even 4 Fed rate hikes this year.

He told Kitco News, "If we do get four rate hikes in 2022, interest rates are going to be at 1%. That's nothing to be terrified about. 

“Paul Volcker took interest rates up into the teens…back in the 1980s, when we had much higher inflation.”

Milling-Stanley added that going back to the 1970s — when the economy has seen sustained levels of inflation above 5% — gold prices have seen nominal returns of around 15% and real returns of about 10%.

In December, government CPI showed an annual increase of 7%. Many economists believe that rising commodity prices and wages will likely keep inflation above 5% for a good piece 2022.

"If that happens,” Milling-Stanley predicts, “then the price [of gold] is going to be on the verge of $2,000 very, very quickly…

We could see that taken out this year."

Investors will remember that the last time gold breached that mark was in August 2020, hitting its all-time high of about $2,070 on August 6.

But Will Hikes Even Rein in Inflation?

Despite all the talk about the Fed hiking rates soon, a new debate is evolving over whether tighter money will actually rein in inflation.

With prices up over 7% year over year, the highest rate of increase in over 40 years, bottles of Excedrin Migraine are in better supply at the White House than N95 masks. 

And until we figure out what’s really causing the inflation, we won’t be able to treat it, as economist Stephanie Kelton wrote last week.

She noted, “It takes a certain hubris to assert that by nudging a single price — the federal funds rate — higher, the entire economy can be shifted back to a stable inflation path.”

Is she onto something? Is it a mistake to believe the fix for inflation that worked for the Paul Volker Fed four decades ago will work again.

Other economists think the Fed needs to do something post haste — i.e., yesterday.

Too big to fail Bank of America’s head of economic research Ethan Harris warns, “The Fed is seriously behind the curve and has to get serious about fighting inflation.”

Former Treasury Secretary Larry Summers has been arguing the same thing; he and others argue that too much fiscal and monetary stimulus is to blame for price increases.

The pandemic is still making the economy uncanny — and unpredictable. Kelton and many others cite the continuing supply chain snags as part of the problem we face.

Economist James K. Galbraith agrees. He blogged last week, “If supply-chain issues can be sorted out, the current inflation tizzy will probably subside early this summer.”

The White House was saying over the summer, but Biden also said last week that fighting inflation was the Fed’s job. 

So, who knows where this all ends up?

Watch for the ECI

The government’s closely watched Employment Cost Index is out this Friday. 

And even though the Fed prefers the PCE index, it’s been closely watching the recent surge in this somewhat under-the-radar metric.

It was this wage growth data that initially pushed Jerome Powell and a few of his FOMC colleagues toward a more hawkish (i.e., inflation-focused) posture on interest rates.

Civilian compensation costs grew 3.7% annually as of the last quarterly report. Economists are estimating the upcoming 4th quarter figure at 4.1%.

Most people would view news of strong wage increases as a good thing, right? I mean, just ask the CEO of too big to fail JPMorgan Chase Jamie Dimon!

But as Matt Phillips reminds us, for Fed policymakers, too much wage growth can be a sign of a spiraling inflationary cycle.

That’s where workers, squeezed by rising prices, demand raises from employers — who then raise prices further.

It’s that purist search for this theoretical equilibrium, as the economists like to call it, that I’m afraid is out of reach — this time around and all times around.

The Fed is just going to have to decide to come down on the side of inflation or on the side of maximum employment and let the chips fall where they may.

And either way, it won’t be pretty. So, make sure you’re prepared and insured.

Remember, gold is not only an important hedge against rising prices, but as Milling-Stanley points out, it can also provide downside protection as equity markets further weaken and volatility picks up even more steam.