Pro Perspectives 2/21/20

February 21, 2020

As we end the week, money is aggressively moving into gold, likely driven by Chinese demand (remember, they injected a quarter of a trillion dollars into the Chinese financial system earlier this month).  Likely following that money, is speculation. 
Why are people speculating on higher gold prices?  To hedge against three scenarios… 

Here they are, from lowest probability to highest probability (in my view):

Scenario 1) – Gold is being bought for relative safety, as a hedge against the worst case outcome for the coronavirus (i.e. Pandemic).

Scenario 2) – Gold is a hedge against the inflation penalty that many believe is inevitable, following the quadrupling in size of global central bank balance sheets since 2007, and the recent return to balance sheet expansion.

Scenario 3) – Despite what may seem (on any given news day) like a scary outlook for the pandemic threat, the highest probability scenario for owning gold at this stage, is as a hedge against hotter than expected growth (by year end) that is accompanied by hotter than expected inflation (i.e. a return of inflation).  Remember, we entered 2020 with the tailwinds of solid economic fundamentals, ultra-low rates, fiscal stimulus still working through the system, and resurgence of confidence following the clearance of the trade war hurdle.  In this positive scenario for the economy, it’s fair to say that the Fed, in its current stance, is at risk of getting behind in the case of an upside inflation surprise.  That would be positive for gold prices.

These three scenarios have varying probabilities, but all point the same direction — north for gold.   On that note, we end the week with gold breaking out to seven year highs …