Gold Prices to Explode Higher on Rampant Inflation and Exploding Debt
With the new tax plan fanning fears of inflation and exploding U.S. government debt, the gold bugs have resurfaced.
Gold prices have spiked about 3.7% to $1,283 an ounce since a nearly five-month bottom on Dec. 12. At current levels on Tuesday, gold prices closed at the highest since Nov. 29, according to Bloomberg data. Gold prices have been above their 50-day, 100-day and 200-day moving averages since Dec. 18 (see chart below).
To be sure, gold bugs have several things to latch onto at the moment.
The gold trade is back. Source: Bloomberg
The tax law could send deficits ballooning by $1.7 trillion over the next 10 years, according to a projection from the Congressional Budget Office (CBO). U.S. debt would rocket to 97.1% of GDP in 2027, up from 91.2% using the CBO’s prior projections. The deficit spike could slowly undermine confidence in the U.S. dollar, sending investors into gold as a safe-haven.
Another consideration is a potential surge in U.S. inflation as corporate and middle class tax cuts ripple through the economy. Gold is often seen as a hedge on inflation.
10 Charts That Show Why Gold Is Undervalued Right Now
With the year quickly coming to a close, it might be time to start thinking about rebalancing the gold holdings in your portfolio. That includes bullion, jewelry, gold stocks and well-managed gold funds—all of which I recommend giving a collective 10 percent weighting. Because it’s been such a strong year for stocks—they’ve advanced more than 20 percent as of today—it’s likely that most investors will need to add to their gold exposure to meet that 10 percent weighting as we head into 2018.
Some investors might wonder why they need gold in their portfolios right now. The stock market is still chugging along, and the just-passed tax reform bill is likely to help ratchet up share prices even more. Cryptocurrencies have been hogging the spotlight lately, especially after bitcoin tumbled nearly 30 percent last Friday morning.
While I’m on the subject, inflows into cryptocurrencies have totaled more than $500 billion this year alone. To put that in perspective, the total sum of global equity mutual fund and ETF inflows were around $411 billion as of November 29. What’s more, cryptocurrencies are now doing as much daily trading as the New York Stock Exchange (NYSE), according to Business Insider.
Just think on that. Something is happening here that cannot be ignored or dismissed.
But back to gold. It’s important to remember that the precious metal has historically shared a low-to-negative correlation with many traditional assets such as cash, Treasuries and stocks, both domestic and international. This makes it, I believe, an appealing diversifier in the event of a correction in the capital and forex markets.
Need more reasons to add to your gold holdings? Below are 10 charts that show why the yellow metal is undervalued right now:
1. The gold price has crushed the market so far this century.
Investors are invariably surprised to see this chart whenever I show it at conferences. Believe it or not, since 2000, the gold price has beaten the SP 500 Index, which has undergone two 40 percent corrections so far this century.
2. Compared to stocks, gold looks like a bargain.
As of this month, the gold-to-SP 500 ratio is at its lowest point in 10 years. For mean reversion to occur, either the gold price needs to appreciate or share prices need to fall. Either way, consider this a once-in-a-decade opportunity.
3. Exploration budgets keep getting slashed.
One of the reasons why gold is so highly valued is for its scarcity. There’s a possibility it could get even scarcer as explorers continue to trim exploration budgets and uncover fewer and fewer large deposits. The time between initial discovery and day one of production is also expanding. This has led many experts in the field to wonder if we’ve finally reached “peak gold.”
4. Gold stocks could be just getting started.
Last year marked a turnaround in gold prices and gold stocks, and according to analysts at Incrementum Capital Partners, a Swiss financial management firm, they’re just getting warmed up.When charted against past gold bull markets, the present one looks as if it still has a lot of room to run.
5. Is too much money going into equities?
More than $80 trillion sits in global equities right now, a monumental sum that’s likely to surge even more as we venture further into the bull market. Some worry this is a ticking time bomb just waiting to go off. Another correction similar to the one 10 years ago would wipe out trillions of dollars around the world, and it’s then that the investment case for gold would become strongest.
6. Higher debt could mean higher gold prices.
The yellow metal has historically tracked global debt, which stood at $217 trillion as of the first quarter of this year. Looking just at the U.S., debt is expected to continue on an upward trend, driven not just by new, and largely unfunded, spending but also underlying interest. By most estimates, President Donald Trump’s historic tax cuts, although welcome, will contribute to even higher debt as a percent of gross domestic product (GDP).
7. The Fed’s about to take away the punch bowl.
“My opinion is that business cycles don’t just end accidentally. They end by the Fed. If the Fed tightens enough to induce a recession, that’s the end of the business cycle.” That’s according to MKM Partners’ chief economist Mike Darda, who was referring to the Federal Reserve’s efforts to unwind its $4.5 trillion balance sheet after it bought vast quantities of government bonds and mortgage-backed securities to mitigate the effects of the Great Recession. There’s definitely a huge amount of risk here: Five of the previous six times the Fed has similarly reduced its balance sheet, between 1921 and 2000, ended in recession.
8. Rate hike cycles have rarely ended well.
Rate hike cycles also have a mixed record. According to Incrementum research, only three such cycles in the past 100 years have not ended in a recession. Obviously there’s no guarantee that this particular round of tightening will have the same outcome, but if you recognize the risk here, it might be prudent to have as much as 10 percent of your wealth in gold bullion and gold stocks.
9. Trillions of dollars of global bonds are guaranteed to lose money right now.
As of May of this year, nearly $10 trillion of bonds around the world were guaranteed to cost investors money, as more and more central banks instituted negative interest rate policies (NIRPs) to spur consumer spending. Instead, it encouraged many savers to yank their cash out of banks and convert it into gold. That’s precisely what households in Germany did, and by 2016, the European country became the world’s biggest investor in the yellow metal.
10. The Love Trade is still driving gold demand.
The chart above, based on data provided by Moore Research, shows gold’s 30-year seasonal trading pattern. Although it’s changed over the past few years, the pattern reflects the Love Trade in practice. According to the data, the gold price rallies early in the year as we approach the Chinese New Year, then dips in the summer. After that it surges on massive gold-buying in India during Diwali, in late October and early November. Finally, it ends the year at its highest point during the Indian wedding season, when demand is high. The pattern isn’t always observed exactly how I described, but it happens frequently enough for us to make educated, informed decisions on when to trade the precious metal. – Frank Holmes
Gold Prices likely to climb above $1,400 an ounce in 2018
The yellow metal’s bear market is coming to an end, with gold prices projected to climb above the $1,400 level in 2018, according to ABC Bullion.
“Gold will continue its recovery from the bear market. We see the metal appreciating towards $1,375-$1,425 in 2018,” chief economist at ABC Bullion Jordan Eliseo told Kitco News in a recent interview.
Some of the key elements to watch next year are U.S. equities, the U.S. dollar, and the Fed, Eliseo said.
Stocks have had an incredible run in 2017, posting all-time highs. “This is one of the first years on record when U.S. equities have essentially been up every single month of the year, while volatility has been at record lows. It is unprecedented,” Eliseo said.
If stocks continue to post gains and volatility remains low, it will be a major headwind for gold prices in 2018, he said; adding that if volatility increases and stocks surprise the markets with declines, then gold prices could greatly benefit.
Eliseo added that he sees the U.S. dollar declining in 2018, which would be a major boost to gold prices.
On top of that, he said a less aggressive Fed could help support gold prices next year.
“I am not convinced that the Fed will be as hawkish as markets are expecting. There are still questions about the low level of core inflation and continued concerns about growth, even though it has been relatively stronger lately,” he said.
In the meantime, the physical demand for gold is likely to remain stable in 2018, Eliseo noted. More specifically, Western demand will improve from its lowest levels in nearly a decade.
“You are going to see buying through the ETF space. Numbers out of Europe this year have been strong both for the ETFs and the physical buying. You will see some continued support there,” Eliseo said.
Central banks will also resume buying, with Eliseo projecting to see a few hundred tons of gold to be acquired again in 2018. Gold demand out of India and China is looking stable as well, he added.
“I’m constructive on physical demand, but I don’t expect it to necessarily skyrocket higher next year,” Eliseo explained.
When discussing this year’s cryptocurrency craze, Eliseo said that he is convinced that some investment flows were redirected from gold to bitcoin.
But, the chief economist noted that the market might see a reversal of that trend next year.
“The bitcoin price rise has been phenomenal and it is unquestionable that it is the story of post-global financial crisis era so far. But you are starting to see problems with exchanges: coins being stolen and platforms shutting down,” he said. “2017 is probably going to remain the best year for bitcoin that we will ever see.”
Also, bitcoin is starting to show clear signs of a classic bubble, Eliseo said.
“Parabolic price increase is a warning sign, the speed at which the prices are rising, the ever more optimistic price projections, and complete fear of missing out (FOMO is truly alive in this space),” he stated. “It is essentially operating as a purely speculative asset. Most speculative assets end up bursting, but it could go a lot higher before it goes lower.”
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