Updated: Aug 6, 2020
Most of you know I have been very bullish on Gold over the last several months. Gold is now holding above $2000 levels which are record highs for the precious metal and I still believe it can head much higher, without any significant pullbacks too. As of writing the price of gold is around $2005. There are several reasons for the recent rally in Gold and it’s not solely due to Covid-19. Even if there was a cure tomorrow, I still believe that Gold will continue to rally. During this pandemic we’ve seen unemployment levels rise, businesses going under at an alarming rate, debt levels increase, economies shrink and government spending skyrocket fuelled by printing money. The picture is being painted and it’s a recipe for disaster. 25% of households in the U.K have less than £1000 in savings and so many people don’t realise they’re a few missed pay cheques away from ultimately being homeless and when we see the end of the mortgage forbearance granted to households, I believe we’re going to see a crash in the housing market. This recession will be the worst we’ve ever encountered in history. Governments are printing money at an alarming rate, paired with inefficient government spending, record low interest rates and GDP dropping. Everything is pointing towards Stagflation (recession fuelled inflation). What it seems people don’t understand is that inflation is a direct tax on cash and will make your money worthless. During times of recessions and immense uncertainty the safest place to invest is Gold and other safe haven assets such as the Swiss Franc and Japanese Yen allowing you to capitalise on the devaluation of currencies and protect yourself against inflation. Let’s look at the two most recent Gold rallies. In 1980, the end of the first great Gold bull market, Gold rallied from $35/oz to a peak of $850 and would have continued to rally even higher if it wasn’t for the FED who managed to convince the market that they were going to unwind their policy, normalise rates and shrink their balance sheet. The FED Chairman at the time, Paul Volker did the right thing and let the markets control the interest rates by finding an equilibrium. Rates went to 20% which ended the Gold bull market. Although it was a bitter tasting medicine, the economy recovered much quicker from the recession because of Volker’s actions.
The most recent Gold rally was in 2011, when Gold peaked at $1900. The reason price pulled back from these highs was because the FED managed somehow to convince the world that QE wouldn’t end in disaster, the programmes work, and because they were temporary, they would be able to shrink their balance sheet to pre 2008 crisis levels and start normalising interest rates. The market actually believed the FED and although they didn’t raise rates – because they couldn’t. The world didn’t realise they couldn’t do what they claim.
Eventually, they had to start raising rates after saying they would for so long and started to do so very slowly which ended in 2018 when all hell broke loose in the Stock Market. The FED reverted back to QE and rate cuts and the reason that there was a lid kept on Gold was because of the rest of the world’s poor monetary policy. Europe started QE and negative interest rates which made America’s economy seem the cleanest out of a dirty bunch. What’s going to stop Gold this time? The FED can’t use this same method to end the current bull market which we are in now. They can’t raise interest rates because they are too broke to afford it or even bluff that they are going to in the future because no one will believe it. They haven’t been able to reduce their balance sheet at $4.5 trillion, who’s going to believe they can when it’s at $10 trillion or even $20 trillion? As of writing, the Dollar Index has lost more than 10% of its value in the last 5 months. With much more selling pressure to come. In 1971, when we left the Gold Standard, the dollar severed its ties with Gold and it resulted in the Dollar losing about 2/3 of its value against the Deutsche Mark, Swiss franc, Japanese Yen and even more to Gold in the decade ahead.
Now I believe we are going to see the world severe its ties with the Dollar, leave the Dollar Standard and go back to the Gold Standard and there will be a more precipitous drop in the dollar’s value than in the ‘70’s. I can’t see what the FED will do to stop the imminent crash, they could pull a rabbit out the hat but what you don’t know, you don’t know. I have been reading about central banks creating their own digital currencies but even if they were going to go in that direction – they would have to have it backed by something to give it value. If they steer away from the dollar it makes sense to use Gold as a backing, rather than let’s say Bitcoin. Although Bitcoin does have its benefits, I can’t see the general population trusting in a system backed by Bitcoin but I can definitely see people trusting in Gold. With all of this in mind, Gold is seriously undervalued and we could possibly see it become worth $8,000-$15,000 in the coming years. If you just look at the price of the DOW which is currently at $26k. During each gold bull market, the DOW was equal to 1oz of Gold at some point during those periods. What’s to say that Gold and the Dow can’t meet at levels higher than $15,000? Currently, even at $2000 levels (record highs) we still have the opportunity to Buy Gold and also Silver at very good prices, but it is important to act. Smart money is already buying up Gold which is being reflecting from the COT reports and when everyone else starts to realise how bad the current economic climate really is, we will see Gold reach new heights.