Could Bullion Be Bottoming?

Gold may be forming a base as the monetary backdrop shifts. The key distinction is between main street inflation, which erodes income through higher consumer prices, and monetary inflation, which devalues paper money and destroys stored wealth. A second distinction now matters too: Chinese liquidity is expanding even as US and Global Liquidity soften. Since the 2008/09 Global Financial Crisis (GFC), gold and cryptocurrencies have been the leading hedges against monetary inflation. Looking ahead, crypto should remain most sensitive to Global Liquidity and US Federal Reserve liquidity, while gold looks increasingly tied to China’s policy response to debt-deflation.

In our view, persistent and nagging debt-deflation will force Chinese policymakers to devalue the yuan domestically through easier money and People’s Bank of China (PBoC) balance-sheet expansion. That process should materially lift the yuan gold price. Because the external value of the yuan is being simultaneously managed, domestic monetary inflation in China should also translate into a higher US dollar gold price.

The chart below plots the US dollar gold price and annotates the key levels implied by the yuan gold price. On this framing, gold appears to be bottoming close to its yuan-denominated trend line at RMB27,000/oz, equivalent to roughly US$4,000/oz.