Bullish Gold: A Case Study for Gold’s Price Run to $2,500 oz
$GLD, $GDX, $SLW, $EXCFF
Those who read this column know that I have been Bullish Gold for several months after noting the end of the Bear cycle in the precious Yellow metal and new forces that will contribute to an even stronger advance for Gold in the years ahead, with the momentum that is developing this year.
The notables, are as follows:
- After the 6X rise from Y’s 2000 to 2012, the precious Yellow metal retraced 45% through the end of Y 2015. It then a 28% rally in 1-H of Y 2016, but gave most of that back 2-H.
- Gold is rising again, rallying 9% since mid-December. Still, Gold is down 34% from its all-time high of 1923 hit in Y 2011. The S&P, on the other hand, has 2X’d since Gold’s peak, and home prices have risen almost 40% in the frame.
- So, the buy low, sell high Wall Street adage means investors to take a serious look at a position in Gold.
- The historic 21st Century debasement of fiat (paper) money. Following the global financial crisis, major central banks around the world resorted to an unprecedented balance sheet expansion to prevent their respective economies from plunging into a deflationary spiral. In the US, the Fed almost 5X’d its balance sheet by buying US T-Bonds and other debt backed by real estate securities. Other major economies have followed suit, notably Europe and Japan.
- Since the US Treasury moved off the Gold standard in Y 1971, the value of Gold and other precious metals has not grown anywhere nearly as much as the quantity of debt and base money that it once backed.
- The quantification of the degree to which Gold has lagged debt and money creation is complicated by the fact that the price of Gold was once fixed at 35 oz from Y 1933 until 1971 while the cost of living more than 3X’d.
- Notably, the price of Gold rose above 35 in the frame from Y 1968 to 1971. The price soared to 180 in just 4 years, catching up with the inflation of the preceding 40 years, and the early 1970s’ inflation spike.
- Gold is now priced at about 29X its Y 1971 price, while the monetary base is up a whopping 54X over the same frame.
- Gold’s price, had followed the trend of the monetary base would now be close to 2500 oz.
- The relevant series that has increased the least is the CPI. The inflation that might have been expected to result from this massive money printing has not shown up yet. In will come and what it does “Katy bar the door”.
- The conventional wisdom argues that rising interest rates would lead to lower Gold prices. Wrong, the Fed has now raised fed funds rates 3X since December 2015. Per the FOMC’s Summary of Economic Projections (SEP), the Fed expects to raise rates 3 more times this year. Yet, the price of Gold is up, not down, from its mark just before the 1st hike.
The prospect of rising rates is often offered some a reason why Gold will not go higher, that reasoning defies the lessons of history: it is clearly not axiomatic that when rates are hiked, Gold slumps. That has often not been the case.
The historical evidence points at times in the opposite direction from conventional wisdom.
Since Gold was freed from its fixed value at 35 oz in Y 1971, there have been 9 tightening cycles. Gold rose during 8 of the 9. Those of us that follow Gold, know that during the 4 years following its Y 2011 high, Gold lost almost 50% its value (in a Fibo retrace) in the face of Zero interest rates and the easiest monetary policy in modern history.
The period of strength in the USD may now be ending, marking the bottom for Gold and reversal of its performance going forward.
The conventional wisdom seems to be that higher nominal US rates will push USD higher. But after decades of following the movement of currencies, we have learned that it is not just nominal rates, but it is inflation-adjusted short term rates that matter.
They are now moving sharply negative, which will derail USD’s rally over the course of Y 2017 and beyond I believe
The plunge in real rates will only get worse as the Y-Y per cent jump in energy prices filters through the numbers in February and March.
This base effect will be a huge factor in driving CPI numbers North, and real rates will drop deeper into negative territory. As a result, MRP expects the USD to come under additional pressure. A falling USD will bolster my Bullish position on Gold (NYSEArca:GLD), Gold Miners (NYSEArac:GDX) and Royalty Streaming companies like Silver Wheaton (NYSE:SLW) and the newest on my radar Metalla Raoyalty and Sreaming, Ltd. (OTCMKT:EXCFF)
All of the above arguments augur in favor of Gold, + they are supported by inflation, changes in Islamic finance rules, central banks buying, Gold production’s peaking, some Gold Bugs belief that short-term economic disturbance in China and India will bring on strong long-term demand, and some degree of global uncertainty as the America take its lead back globally.
All of the above fundamentals together add up to a strong case for the precious Yellow metal, shares of the major Gold miners, and the royalty streamers.
Overall, my work makes a strong case for the prices precious metals to continue to rise over the long term.
Have a terrific weekend.