Hoogland: Gold Ready for the Next Upward Phase

According to Jack Hoogland, the party is about to kick off again. The price chart points to a new upward phase, while liquidity is flowing back into financial markets. Is this the beginning of the next upward move for gold?

Gold price

In the very short term, the price chart below shows an important signal that gold is set to start a new advance. The higher low, followed by a breakout, indicates that the price trend is indeed turning upward again. 

Today, however, I mainly want to show why we are very positive for the remainder of this year. First, here is the famous quote from Stanley Druckenmiller that I showed our readers during every correction over the past year.

For us, everything revolves around the question of whether liquidity will flow away from, or instead toward, financial markets in the coming period.

The effect of shutdowns

In the chart below from Raoul Pal, we see that global liquidity is rising, but at the same time that this increase in the US (red line) had been losing momentum.

The main cause was the series of government shutdowns, the most recent of which ended earlier this month. When a shutdown is looming, the US Treasury always sets aside enough cash to ensure that bills can continue to be paid.

Now that the threat has largely passed…

Last week, the Treasury held no less than $925 billion in its account at the Fed. In the image below, we can see that this balance has now fallen to $888 billion.

With hardly any remaining threat of shutdowns, this balance will (as after previous shutdowns) decline sharply. In other words, up to the midterm elections, the US Treasury will inject at least $500 billion of liquidity into the financial system.

Add to that the $40 billion that the Federal Reserve is currently printing each month, and at least $100 billion per month will be pumped into the system through November. We are now also seeing commercial banks once again buying up large amounts of government bonds.

The chart below shows how rapidly the combined holdings of government bonds at the Federal Reserve and commercial banks are now increasing. With the help of commercial banks, well over $100 billion in freshly printed money is now being injected into the financial system. On top of that come several interest rate cuts, which will generate even more liquidity.

At least until November, a tsunami of liquidity will be poured over the financial markets. In my view, this development is extremely positive for gold, silver, copper and uranium, among others.

Jack Hoogland worked at the American bank Citigroup in Amsterdam, Düsseldorf, Madrid and Brussels as a Financial Analyst, Risk Manager and Finance Director. He has followed the financial markets since the late 1980s and, after the credit crisis, increasingly shifted his focus toward macroeconomics and the financial system. Read more from Jack Hoogland.