Gold Ready to Recapture Levels Not Seen Since 2016

Sprott Money CEO says current landscape is more favorable for gold than two years ago.

2016 was the last time gold climbed past the $1,370 level, brought up by a string of geopolitical concerns and a weaker dollar. But now, having already crossed the $1,340 mark, the metal looks ready to recapture levels last seen two years ago, while also setting new records in the process, reports Kitco.

In an analysis on Sprott Money, Global Pro Traders CEO David Brady explained why he thinks the current landscape is even more favorable for gold than 2016 was. According to a recent Kitco article, despite a robust greenback, which is often seen as one of its main headwinds, gold still managed to surpass $1,340 an ounce since the start of the year.

This display of strength is set to continue, said Brady, who sees gold heading towards the 2016 high of $1,377 this year, largely driven by central bank policies. As Brady noted, the Federal Reserve might be looking at a policy U-turn after hiking interest rates on an annual basis since 2015.

According to Kitco, the recent dovish stance expressed by Fed officials could soon make way for quantitative easing (QE), an inflationary policy that has heavily benefited gold in the past. Brady and other analysts contend that a new QE program will drive prices up, yet without the prospect of higher rates or Treasury yields. This will be the perfect environment for gold to stage its bullish run, said Brady.

The strategist feels that the recent sentiment turnaround among money managers is testament enough that gold is soon heading up. In just fourteen weeks, speculators slashed their short gold positions by more than half, which speaks good things about the metal's direction, reports Kitco.

Past the Fed situation, Brady feels that central bank policies around the world will likewise prove supportive of gold. As the CEO noted, all of these policies are ultimately setting fiat currencies up for depreciation, and gold is often cited as the best and surest protection from wealth erosion.

After hitting the $1,377 mark, Brady expects gold to pull back and potentially test several support levels along the way. This pullback, however, will merely act as part of an over-arching upwards trend that will eventually lead gold to new highs before the end of the year.

Meanwhile, Brady expects the opposite to happen with the dollar index (DXY). After so many months of persistence, the CEO finally sees the DXY peaking and falling to a figure as low as 80, which will be another highly bullish development for gold.

Official casts doubt on Federal Reserve policies

A long-time Fed is worried: "We're not going to be able to hold the line anymore."

In a recent interview with the New York Times, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, voiced some serious concerns over the long-term effects and ramifications of the Fed's ongoing loose monetary policies.

Plosser, whose term as a key policy maker in the bank will end in March, has often criticized the Fed's policies during his nine-year term on the board.

Plosser maintains that history has proven that monetary policy is only a temporary way to assist economic growth and that, once we reach a tipping point with the Federal Reserve's loose monetary policies (such as Quantitative Easing and near-zero interest rates), we will experience significant negative backlashes. Most recently, the European Central Bank experienced this first-hand when the Swiss National Bank de-pegged the franc from the euro, thus sending the value of the euro plummeting. According to Plosser,

"At some point the pressure is going to be too great. The market forces are going to overwhelm us. We're not going to be able to hold the line anymore."

Plosser argues that the idea that low inflation somehow indicates a weak economy was rebutted in the 1970s, and therefore calls for raising short-term interest rates ahead of time – regardless of what the move's effects may be on inflation. By taking such an action, one of his primary hopes is to avoid reaching a point in the future when market forces dictate that the Fed must increase interest rates quickly. Such a scenario could be disastrous to the economy and cause significant volatility.

Plosser also stresses that any monetary or fiscal policies, especially as loose as those of the Federal Reserve, cloud our view of normal market conditions. He argues that we must deal with the economy in a realistic fashion rather than through unrealistic or overzealous application of stimuli. If anything, he believes that most of the Fed's loose policies should have ceased as soon as the financial crisis was over.

One major concern is what the consequences of the Federal Reserve's monetary policy will end up being, especially over the next five to ten years. Plosser claims that the real cost of what the Fed is doing has not yet been determined:

"I think the jury is still out on the costs. Because the cost I was worried about was the longer-term cost of unraveling all of this. So maybe I was right, maybe I was wrong. That remains to be seen."

Once the market realizes that the Fed can no longer keep holding interest rates back in order to increase liquidity, a snap-back in premiums will become unavoidable. This threatens to further plunge the economy into uncertainty and volatility as everyone would suddenly finds themselves with less money.

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