The Fundamentals for Gold Are As Strong As Ever

Although businesses are reopening, the economy faces multiple headwinds, including massive debt and deficit spending. Here's why that's good for gold.

As businesses slowly reopen after nearly a three-month lockdown, FXEmpire's Arkadiusz Sieron delves into what Americans, along with gold investors, can expect as the climate normalizes. Although dubbed the "Great Unlock", the reopening isn't a single sweeping action performed by the government, just as the lockdown wasn't.

Sieron notes that various state-level entities, as well as citizens themselves, began applying preventive measures before any governmental say-so and, in some cases, extended the measures past the mandatory level. Similarly, the reopening of the economy and the continuation of business will be far from the flip of a switch that some are expecting.

As an example, Sieron points to the restaurant industry, which accounts for around 16 million jobs in the U.S. Even if the government was to allow all establishments to fully open up, many consumers would find themselves with a newfound skittishness in regards to being in a large and dense crowd. 

This is just one example of how the economy could struggle to get back on its feet for some time.

This brings Sieron to the idea of a V-shaped or quick recovery, one which many are hoping for, and yet one that even the Federal Reserve isn't too optimistic on. All of these issues tie closely to gold and how the metal was performing throughout the pandemic.

It's no secret that the metal was the best-performing asset during the onset of the lockdown, as unprecedented uncertainty caused it to soar to seven-year highs. As one might infer from gold inching just below $1,700 last week, traders are likely hoping that the heaps of stimulus and heightened economic optimism will pour over into the coming months. In truth, however, the global economy was far from flourishing heading into the pandemic.

Interestingly enough, the broad asset sell-off in March was the first major hurdle that gold experienced in more than six months, as the metal had been climbing due to numerous sturdy fundamentals. The tables began to turn around mid-2019 as central banks embraced low or negative interest rates, which have all but become the norm as a response to the pandemic. The slicing of benchmark rates brought to the forefront all of gold's strong tailwinds, which many pointed to as the metal's perfect storm.

To be sure, the return to pre-pandemic economy strength will be a gradual process, with plenty of question marks along the way. Yet perhaps the most important takeaway for gold is that the global economy was in a state of contraction prior to any mention of the virus, while the domestic economy was feeling the weight of seemingly unsolvable debt and excessive fiscal spending, along with a host of other issues. Besides potential currency debasement as a result of stimulus measures, the pandemic could also strengthen gold's upwards trajectory by greatly exacerbating the issues of federal and national debt, to speak nothing of the economic sluggishness itself.

UBS Predicts Higher Gold Prices in Near Future

A strategist from the bank explains their bullish outlook, particularly regarding the shift in investor sentiment brought on by the global pandemic.

In a recent interview with CNBC, Joni Teves, a precious metal strategist at UBS Investment Bank, shared the bank's outlook for gold over the coming months, particularly regarding the shift in investor sentiment brought on by the global pandemic.

According to Teves, the slump that gold experienced during March's broad market selloff is long gone, and the metal is primed to continue climbing as it has been doing since mid-2019. Over the past weeks, gold has consistently closed trading sessions around $1,700, with frequent climbs to around the $1,720 level.

Teves and her bank believe that the steady upwards trend will continue, placing $1,790 as the target level for gold in the short-term. Over a slightly longer period, Teves thinks that there is plenty of room for gold to move past $1,800.

Speaking about the reasons for her bullish forecast, Teves explained that investor interest in the metal continues to grow, both among individual investors and funds that were short gold not too long ago. Teves attributes this to nearly unprecedented levels of uncertainty and expectations of low growth that were a significant talking point even before the pandemic hit. Likewise, plummeting interest rates will diminish the appetite for bonds, lowering the amount of choices investors have to hedge their portfolios and diverting attention to gold.

Fat Prophets' resources analyst David Lennox shares the view that central bank actions will continue to greatly benefit gold from various angles. Whereas certain currencies might have been seen as a safe or attractive investment prior to the coronavirus outbreak, the debasement of fiat due to monetary stimulus will rapidly change this notion. Lennox, like many other analysts, also points to the worrisome issue of global debt, one for which there is no solution in sight and will greatly worsen as various governments scramble to mitigate the damage to their economies caused by the coronavirus.

As a side note, the World Gold Council's end of April report revealed that the coronavirus was the biggest driver of gold demand, with investors piling into the metal and funds buying the most gold they have in four years. Prior to the coronavirus, global central banks were spearheading bullion demand and have doubled their yearly purchases between 2018 and 2019. Keeping the WGC's report in mind, it should be interesting to see how the gold market's demand dynamics move, along with the figures themselves, as the situation progresses.

Get Ready for Skyrocketing Inflation (And Gold), Says CIO

As the Fed swiftly acts to save the US economy, one financial expert predicts that inflation will a necessary component. Find out what this would mean for gold.

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According to Forbes contributor Bob Haber, the U.S. has wholly embraced Modern Monetary Theory (MMT), a concept that makes many an economist recoil. In its most basic definition, MMT is an amplified version of quantitative easing (QE) that essentially allows central banks to print as much money as they please and ostensibly offset the resulting inflation through taxing the wealthy.

While zero or negative interest rates and QE were already present around the world before the coronavirus, Haber notes that those loose monetary policies will soon seem moderate. He acknowledges that the Fed needs some tools to battle the unraveling recession, yet as the hyperinflated economies of Venezuela and the Weimar Republic show, uncontrolled money printing only moves in one direction.

In essence, inflation is the only way out of the existing economic woes that have combined with the latest blow to create a uniquely difficult situation. Ahead of the pandemic, the U.S. was already dealing with $23 trillion of debt and over $1 trillion of fiscal deficit, two issues that many considered unsolvable. Now, Haber expects the debt bubble to climb to $30 trillion by the end of 2020, paired with the likelihood of increased federal spending to stimulate the economy. To add, there is also an ongoing pension crisis that will hardly change for the better with recent developments.

To Haber, there is only one path for the Fed, and it is a clear one. The central bank has already printed $1.4 trillion over the past two weeks, with the Bank of America equating this to $1 million printed every minute. Evercore ISI estimates that the Fed's $5.7 trillion balance sheet, one that the bank was looking to reduce not too long ago, could double by July. If it does, it will represent 50% of the national GDP, a baffling contrast to the 5% it represented in 2008. As Haber notes, the only remedy for this is to wholeheartedly embrace inflation in order to make $1 trillion seem closer to $100 billion.

Just as the Fed has a single path of action ahead, so do investors looking to respond to the paradigm shift that has arrived. The average investor who previously held a gold allocation between 5% and 10% will need to reassess the landscape and consider increasing said allocation to 15%-20% as the money supply expands.

As Haber points out, investors haven't been waiting around for inflation to take its toll and have already jumped on the gold wagon to protect their wealth. When gold prices peaked in 2012 around $1,900, large funds held 82.5 million ounces of gold. Now, Bloomberg data shows that fund holdings have already climbed to 91.2 million ounces. Aside from commercial investors going long gold across the board, Haber also points out that mining companies have warned that the production of the metal has essentially peaked. Haber firmly believes that gold is not only primed to soar past its all-time highs, but also keep moving up so long as the Fed sticks to its ultra-loose policy.

Here's Why One Analyst Sees Massive Upside Remaining for Gold

After already surging above $1,500 this year, Frank Holmes writes in Forbes that he sees reason for gold to go much higher in 2019. Find out why here

Earlier last week, gold briefly fell below $1,500 before jumping back to its current level above $1,520. Forbes contributor Frank Holmes believes dips like these present a tremendous buying opportunity considering what's in store for the metal. In his latest analysis, Holmes outlined three key reasons why gold could surge far past its recent 52-week highs.

As his first reason, Holmes lists the often overlooked, but paramount factor of U.S. inflation. Despite expectations that consumer prices would rise when President Trump took office due to his trade policies, the official rate of inflation has remained still for the most part over the past couple of years. Now, however, things might be finally catching up.

The August inflation reading showed that core consumer prices rose to an 11-year high, amounting to a 2.4% growth year-on-year. This represents the biggest inflation spike since September 2008. Adding to that, August's report also showed the biggest monthly rise in medical care costs since 2016 and record increases in health insurance costs. Combining this with the effect that import tariffs are likely to have, Holmes thinks that we are headed for a period of rapidly-rising inflation that will catch many off-guard. Gold has historically acted as the premier hedge in order to combat inflation and protect one's savings.

Holmes further points to what he calls the negative-yield phenomenon: currently, $17 trillion of global debt trades with a negative yield, which has helped pushed gold to all-time highs in a number of top currencies. Although negative-yielding bonds haven't reached the U.S. yet, Holmes expects Treasuries to soon be affected by the phenomenon as well.

Besides extremely disappointing showings by the 10-year Treasury and a much-feared yield curve inversion, Holmes also notes that the Federal Reserve has shown a willingness to cut rates in quick succession. A week ago, President Trump encouraged the Fed board to push rates to zero or below zero to compete with other top economies, after previously calling for a rate cut of 100 basis points. Should U.S. yields indeed fall into negative territory, it would not only eliminate a main haven competitor but also cause an immense surge in gold prices in dollar terms.

Negative-yielding U.S. debt is far from the only economic concern, as Holmes lists a slew of geopolitical and economic risks as his third reason for why gold is poised to keep moving higher. The trade tensions have played their part in slowing global growth, as factory production worldwide has now contracted for two straight months. The likelihood of a no-deal Brexit has also brought gold to an all-time high in pound sterling terms, as British investors rushed to the metal in preparation of turmoil. Flare-ups like the unrest in Hong Kong and the recent attack on Saudi Arabia's oil facilities have also kept investors on their toes.

In an interesting note, Netherlands' central bank (DNB) recently hinted to a belief that the monetary system could collapse, and that gold would serve as the asset to rebuild it. Holmes found this to be very much in line with the portfolio strategy of the official sector, as global central banks have been net buyers of bullion since 2010 and have lately upped their purchases by a tremendous margin.

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.