The viability of Gold in this macroeconomic climate

Sunday Summary ~ 21/08/2022

After hectic weeks of earnings and CPI reports, volatility continued throughout last week following doubts over the recent July rally in stocks and whether the rally was a potential grasp of hope by investors.

What happened last week?

The shares of Bed Bath & Beyond (BBBY -40.54%) experienced significant volatility, gaining almost 300% from Monday to Wednesday following a massive pump from investors who sought to gain from the meme stock. However the stock has since plummeted as on Thursday, it was revealed that billionaire investor Ryan Cohen had since sold all of his shares in the business after making it appear like he was involved and invested in the long-term success of the company.

Overall it was a relatively quiet week in the market. All eyes now look towards the Jackson Hole economic summit next week. 𝗧𝗵𝗲 𝗳𝗼𝗰𝗮𝗹 𝗽𝗼𝗶𝗻𝘁 𝘄𝗶𝗹𝗹 𝗯𝗲 𝗣𝗿𝗲𝘀𝗶𝗱𝗲𝗻𝘁 𝗝𝗮𝘆 𝗣𝗼𝘄𝗲𝗹𝗹’𝘀 𝘀𝗽𝗲𝗲𝗰𝗵 𝗼𝗻 𝗧𝗵𝘂𝗿𝘀𝗱𝗮𝘆, 𝗮𝘁 𝟭𝟱:𝟬𝟬 𝗖𝗘𝗦𝗧. Fed leaders in the past have taken advantage of this speech to signal major changes in 𝗺𝗼𝗻𝗲𝘁𝗮𝗿𝘆 𝗽𝗼𝗹𝗶𝗰𝘆 𝗼𝗿 𝗲𝗰𝗼𝗻𝗼𝗺𝗶𝗰 𝗼𝘂𝘁𝗹𝗼𝗼𝗸. Powell will indicate whether the bank will continue to raise interest rates and leave them higher for longer than expected in an attempt to bring down higher inflation for decades. Thus, we could see a sharp u-turn in market prices, and in particular Treasury prices.

Analysis on Gold and Silver

I have not yet properly discussed some of my own conclusions on certain stocks or commodities, thus I would love to share with you some of my recent research I carried out about Gold and Silver.

𝙒𝙝𝙖𝙩 𝙞𝙨 𝙞𝙣𝙛𝙡𝙖𝙩𝙞𝙤𝙣 ?

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. Recently we reached 40 year highs - at a level of 9.1% inflation in June - but due to rates increased but the FED by 75 basis points, the levels went down to 8.5% in July.

𝙃𝙤𝙬 𝙙𝙤𝙚𝙨 𝙞𝙣𝙛𝙡𝙖𝙩𝙞𝙤𝙣 𝙖𝙛𝙛𝙚𝙘𝙩 𝙩𝙝𝙚 𝙥𝙧𝙞𝙘𝙚 𝙤𝙛 𝙜𝙤𝙡𝙙 ?

During inflation, the costs of consumer goods increase and become more expensive, thereby making the dollar lose value. Since gold is dollar-denominated, its price also increases in line with the rising inflation. Applying that to the chart of $GOLD in June we saw levels ranging from a high of 1875.71$ to a low of 1802.50$, having an average price (not an official number) of about 1830$. However in July, we saw a considerable drop in value, while inflation is still up at 8.5%. Why is that ?

𝙃𝙤𝙬 𝙞𝙨 𝙜𝙤𝙡𝙙 𝙞𝙣𝙛𝙡𝙪𝙚𝙣𝙘𝙚𝙙 𝙗𝙮 𝙞𝙣𝙘𝙧𝙚𝙖𝙨𝙚𝙙 𝙧𝙖𝙩𝙚𝙨?

This is a reverse-relationship, with the inflation rising. When interest rates are falling, people don't get a good return on their deposits causing an increase in golds demands and so the price. On the other hand, when interest rates rise, people sell their gold and invest in depositing to earn high interest leading to a drop in demand and price. This can be seen in the chart of $GOLD throughout the whole July month, having a down-trend for about 3 weeks and recovering in the last week of the July month.

𝙎𝙤 𝙞𝙨 𝙜𝙤𝙡𝙙 𝙖 𝙜𝙤𝙤𝙙 𝙞𝙣𝙫𝙚𝙨𝙩𝙢𝙚𝙣𝙩?

The federal funds rate now sits at a range of 2.25% to 2.5%. But the Fed thinks this needs to go up significantly to see progress on inflation, likely into the 3.5% to 4% range, according to Powell. The Fed's latest estimate is that, by the end of this year, the federal funds rate will sit at a range of 3.25% to 3.50%. As of 3 days ago, algorithm-based forecast site WalletInvestor was bullish in its projections, indicating that the gold price could move up to $1,825.67 by the end of 2022.