Weaker-than-expected economy could be the perfect catalyst for next gold bull market.
Central banks from around the world have grown bolder in their approach, with many of them embarking on a course of tightening monetary policy for the first time in recent memory. Aside from the U.S. Federal Reserve's much-publicized rate hiking, the Bank of Canada recently raised rates for the first time since 2010, and the European Central Bank indicated that it might follow suit.
According to Sprott Inc. CEO Peter Grosskopf, however, the banks are operating on overly optimistic economic forecasts and will not be able to hike rates as quickly as expected. "We think the underlying economies and the strength of the economies can be debated," Grosskopf explained. "If you look at the underlying statistics, it's a lot less evident that the economy is strong."
Grosskopf believes this will provide the next leg up for the yellow metal, with weaker-than-expected economic growth leading to the stock correction that many are expecting. This risk-heavy environment would act as a perfect catalyst for the next gold bull market.
"The next move on gold will be driven by an equity market correction," Grosskopf told Bloomberg in an interview. "It's a pretty safe bet that if equity markets start to look volatile and dangerous then a lot of money will flow into gold as a hedge to that."
Sprott USA chairman Whitney George agrees that it's dangerous for central banks to hike in unison amid low inflation. He expects this to not only put pressure on the stock market but to also negatively affect the currencies of the countries involved.
"When you look at the history of the last 20 years, every time central banks have decided it was time to take the punch bowl away we've had quite a dislocation," says George.
Grosskopf, whose firm is in the midst of returning to a precious metals-oriented investment strategy, feels that investors have been lulled into a false sense of security, resulting in a reduction of their gold positions.
These investors are sure to flock back to the safety of the yellow metal as soon as they think trouble is brewing, allowing gold to reach new heights. According to the firm's strategists, gold has the potential to rally past $1,400 by year's end.
"People haven't placed a high priority on having a hedge because the punch bowl seemed to be relatively full," said Grosskopf. "Gold is vastly under-invested by most investors, so it's got a lot of growth ahead of it."
