Gold Fever Spreading as Prices Breach $1,400

FXEmpire's Stephen Innes lays out why gold is the asset to keep your eyes on.

Last week, FXEmpire's Stephen Innes commented in a Yahoo article on gold's rapid upswing, in which the metal went over $1,350 after weeks of lingering below the $1,300 level. At the time of publication, the metal had just touched the $1,350 mark before moving lower. Innes was adamant that we were seeing the beginning of a shift towards safe-haven assets amid mounting risks and threats to the global economy.

Since then, Yahoo reports gold has blazed past $1,400 within a week's time and reach $1,411 on Friday, the highest level in almost six years. The move stunned even optimistic forecasters who expected the level to be reached later in the year, as summer traditionally tends to be a tepid month for gold prices. The action solidified Innes' view that a veritable gold fever is on the horizon, as all the pieces appear to be falling into place.

Perhaps the most remarkable thing about gold's breakout, states the article, is that it happened during a time of a robust greenback and U.S. equities. As Innes noted, both were holding firmly as gold surged to the $1,350 level, hinting that the price action is being driven by pure investor appetite.

Innes also points out that gold is currently supported by various favorable factors, such as lower U.S. rates and dovish looks from Fed officials. According to Innes, however, the real driver of the gold rush comes in the form of fear over geopolitical risks.

The recent heating of tensions between the U.S. and Iran over the drone shootdown in the Strait of Hormuz represents a red-flag that some traders might be overlooking, but Innes isn't. Having traded gold for decades, Innes knows full well how the threat of military conflict can escalate safe-haven demand even during times of prospering economies.

The latter part has looked especially questionable as of late, as the escalating U.S.-China trade war has the global markets more  worried than they have been in a long time. The tariff conflict comes during a time of both domestic and global growth slowdown, as well as a reasonably high consensus among analysts that a U.S. recession is around the corner. Investors are also anxiously awaiting the upcoming G20 summit, as it could signal more bad news for risk assets.

Innes has long maintained that gold is a must-have inclusion to any portfolio, adding that the rapid break above the $1,350 level should be sufficient to awake dormant investors and allow them to reach the same conclusion. Interestingly enough, central bankers have been the most consistent gold bulls, as the official sector continues to load up on bullion at a record pace and irrespective of any market fluctuations. According to Yahoo, China's purchase of 16 tons of bullion is only the most recent example of how central banks will continue to act as the strongest pillar of gold demand.

Given his previous prediction that gold will jump to $1,400 an ounce in 2019 from the $1,200 levels in late 2018, it should be interesting to see how far gold can go from this point, as Innes shows exhilaration for the metal's prospects going into 2020.

Degussa Analysts Show Gold Has Beaten the U.S. Dollar for Nearly 50 Years

While the U.S. Dollar is subject to systemic shock, gold benefits from it.

In less than a week, gold bounced back from a lengthy tepid period to gain roughly 5%, bringing it to a three-month high. The outperformance could be seen as a victory against a persistently strong dollar, which has kept gold prices subdued over the previous months despite intensifying haven demand.

However, according to an article on Kitco, analysts at Degussa explained why gold has been beating the dollar for nearly 50 years, even during times when the greenback seemed unshakeable. Compiling data from 1970 to 2018 and focusing on gold prices in real terms by taking inflation out of the equation, Degussa's team found that gold has returned an average of 5.9% each year.

In contrast, holding U.S. dollars in a three-months old bank account would have annualized an average return of 4.6%. The results of the study largely stem from the dollar's continued loss of purchasing power, as the greenback has lost as much as 85% in that regard since 1970.

The analysis comes as investors worldwide begin to doubt the stability of supposed safe-haven currencies and the monetary systems built around them. As Degussa's analysts noted, much of the global monetary system rests on the U.S. dollar keeping its value, yet there are signs that the greenback could soon find its role compromised.

With the ongoing threat of China dumping an immense amount of U.S. bonds and a national debt of over $22 trillion, one could make the argument that the greenback hasn't looked as vulnerable in a while. Like all currencies, Kitco states the U.S. dollar is subject to systemic shocks, yet its status makes these scenarios particularly menacing. As the world's reserve currency, a rapid faltering of the U.S. dollar and the ensuing loss of confidence in it could plunge the entire global economy into chaos.

Gold, on the other hand, suffers no threat from questionable central bank policies or collapsing economies, but rather benefits from them, reports Kitco. The only cited downside to owning gold comes in the form of a perceived opportunity cost of holding it during times of higher interest rates. With the Federal Reserve's quick shift from a hawkish standpoint to one that signals concern, even this perceived downside has been eliminated.

Degussa's analysts think that the economic outlook is fairly straightforward. The steady trickle towards negative interest rates by the world's major economies will create a situation where owning bonds punishes investors instead of rewarding them. Add to this the ever-shakier haven currencies, and the analysts say people will once again be reminded that gold is the only true safe-haven asset with no clause or vulnerability.

The latter point couldn't be timelier, as most agree that the era of risk-on investment is drawing to a close. According to Kitco, U.S. stocks are about to end a decade-long bull run as growth concerns reverberate across the globe. As central banks prepare to debase currencies further through more money-printing programs, the impending move towards safety-oriented strategies could look more like a panicked rush than a steady migration.

Gold is Only Life Raft Available to Investors From Sinking Global Currencies

Peter Grosskopf sees gold as only viable choice of protection against coming storm.

In a recent note regarding the state of the markets, Peter Grosskopf, CEO of Sprott Inc, likened currencies around the world to a sinking ship. And according to the executive, gold is the only life raft available to investors looking to preserve their wealth.

According to an article on Kitco, given the amount of looming risks, Grosskopf is shocked that investors are still clinging to the waning stock market instead of flocking towards gold. Global debt continues to spiral out of control, with the latest IMF report placing the figure at a staggering $184 trillion.

Domestic investors may be more concerned with U.S. debt, which surpassed $22 trillion not too long ago reports Kitco. Numerous economists have cautioned that a national debt of $24 trillion would mark a point of no return, a warning that was echoed by President Trump himself. Considering the speed at which the debt is expanding, Kitco states the latter figure could likely be reached within a few years' time.

Perhaps even more so than the amount of debt in question, Grosskopf finds governmental response to the issue alarming. For the most part, governments around the world have not only ignored the mounting domestic and global debt, but also continue to entertain loose fiscal policies. The U.S. is on the cusp of reaching a budget deficit of $1 trillion, yet federal spending has only increased in recent times.

Central banks won't be able to sweep the problem under the rug for much longer, said Grosskopf, as a growing number of pension and entitlement programs are placed into question. As has often been the case, Grosskopf believes that central bankers will respond to the issue with even more lax policies.

A prime example of this is the Modern Monetary Theory (MMT), a more intense version of traditional quantitative easing programs. According to Kitco, because of the MMT's populist nature and the promise of easy money, the supposed solution has quickly gained public support. Grosskopf, like most other economists, find the notion of MMT not only unsustainable, but also likely to end up undermining the global economy.

The appeal of MMT to the average person means that the model is being used as a political tool, which Grosskopf believes will expedite the economic avalanche that's already taking place. And while there are a few safe-haven options available, Grosskopf sees gold as only viable choice of protection against the coming storm.

Whereas other havens like government bonds or reserve currencies are highly vulnerable to crises, Kitco states gold is the only asset that has kept its value regardless of the sort of economic downturn unraveling locally or globally.

Grosskopf also reminded investors that gold has acted as a currency for millennia, stating that the metal has a good chance of returning to this role. As the weight of global debt becomes too great and currencies grow shaky, Grosskopf thinks gold will once again become an accepted medium of exchange.

ETF Manager Says Believes it's Time to Move into Gold

Fritz Folts says the risk-happy investment landscape in recent years is quickly shifting to one that favors safer assets like gold.

According to a recent article on Bloomberg, a veteran fund manager with over three decades of experience has lost his appetite for ETFs and is moving into gold. Fritz Folts currently acts as chief investment strategist and managing partner at 3EDGE Asset Management, where he oversees $800 million in assets. The firm started in January 2016 with $100 million under management, and has since averaged an annual return of 9.03% in its portfolio.

During their early days, the firm focused heavily on emerging-market ETFs and country-specific funds and made several profitable bets along the way. But the article reports Folts no longer sees this strategy as prudent and has slashed his positions in stock-backed funds while eliminating his exposure to emerging-market ETFs.

Folts' reasoning is straightforward – he says that the risk-happy investment landscape in recent years is quickly shifting to one that favors measured bets and safer assets. In fact, 2017 is an example of how growth momentum and optimism from investors can combine to propel a market sky-high, as equities kept reaching new peaks throughout the year.

In 2018, the senior money manager sees growth diminishing across the board and investors becoming wary of over-exposure to risk. The article states the latter has become that much more apparent by this year's sharp tumbles in the stock market, which were concerning enough to elicit a response from the White House.

In a phone interview with Bloomberg, Folts shared his view that gold is becoming the asset to own in this new environment. To him, the metal is the best way to absorb external shocks and combat the rise in volatility. Gold has gained 1% over the past month, aided by geopolitical tensions and the possibility of a trade war between the U.S. and various other top economies.

What started as an increase in tariffs on metal imports by President Trump escalated into a back-and-forth between the U.S. and China, sparking concerns that the global market could suffer as a result, reports the article. The European Union likewise responded negatively to Trump's restrictions, threatening to retaliate in kind should the policy continue. These events placed further pressure on the stock market, which was already showing its first cracks, and reignited interest in precious metals.

Folts is also bearish on debt and expects rising rates to continue pushing bonds down. Absent a particularly strong corporate earnings report or an abrupt change in the Fed's rhetoric, he sees little reason to place faith in stocks and speculative ETFs, especially given gold's strong performance as of late.

"We will definitely have more volatility this year," he added. "And gold can help us there."