History suggests gold has a lot of room to run … interest rates at 0% for years … massive government spending … focusing on the long-term
On Tuesday, gold prices spiked to their highest level in nearly eight years.
But if Eric Fry is right, this is just the beginning of far greater gains to come.
… even though the yellow metal’s price has been climbing since 2018, it remains well within parameters that most investors would consider “normal.”
But if past is prologue, the gold price will become much less normal over the next two or three years.
As we near the mid-point of 2020, gold is up 17% on the year while the S&P is down nearly 6%.
Can we expect the same forces that have pushed gold higher to continue to propel it forward as we look ahead to 2021 and beyond?
Today, let’s see why Eric’s bottom-line answer is summed up in two, simple words …
Buy gold.
***The rotation into gold is speeding up
For any newer Digest readers, Eric is our global macro specialist and the analyst behind Fry’s Investment Report. He also happens to be a veteran investor with decades of experience and one of the best long-term track-records in the investment newsletter industry.
In his update to subscribers earlier this week, Eric highlighted the mass rotation into gold.
He began by noting how investors have been pouring money into gold exchange-traded funds (ETFs) for the last several months, resulting in their gold-holdings surging to a record 101 million ounces.
Here’s Eric for more:
In fact, investors are buying into gold ETFs at the fastest pace since 2016. That buying has produced a 20% jump in ETF gold holdings, compared to one year ago.
That’s a promising sign for the gold market. Here’s the quick and dirty …
Based on the last 15 years of data, whenever the combined quantity of gold inside all the gold ETFs increased by 20% or more year-over-year, the gold price performed brilliantly over the ensuing one-, three-, and five-year time frames.
Based on monthly readings, ETF gold holdings have jumped more than 20% only 36 times out of 179 observations dating back to 2005.
After those 36 instances, the gold price was:
- 17% higher on average one year later
- 40% higher on average three years later
- 106% higher on average five years later
Now, this is clearly a great sign for gold bulls. But let’s try to poke holes in our bullish thesis.
After all, there’s the old saying that goes something along the lines of “inexperienced investors focus on what can go right, experienced investors focus on what could go wrong.”
But as it turns out, one of the biggest potential “go-wrongs” for gold isn’t going to be an issue for at least two years.
***Removing a major hurdle to higher gold prices
There’s a strong case to be made that gold’s biggest “kryptonite” is high interest rates.
As we’ve detailed here in the Digest, in a high-rate environment, investors are able to generate solid cash-flows from various income investments. Since gold offers no such cash flow, demand for the precious metal tends to decline as rates rise.
But this works the other way too, with gold shining as rates fall.
Back to Eric:
If CDs, bonds, and other fixed-income investments are paying miserly rates of interest, gold becomes a relatively attractive asset to hold.
That’s because the “opportunity cost” of holding gold is negligible when rates are super-low. Further, gold has the ability to appreciate significantly and/or offset the effects of inflation over time.
In a low-rate environment, CDs and money market funds can do neither.
Today, we have a low-rate environment extending miles out toward the horizon, thanks to one person …
From Eric:
… the gold market has a new “BFF” … and his name is Jerome Powell, chairman of the Federal Reserve.
Last week, Powell shocked investors by stating his intention to hold interest rates near record-low levels until at least 2023 …
That’s music to the ears of the gold market, because as I’ve discussed in several previous musings, gold loves low interest rates.
***Adding another tailwind to the gold bullish case
The U.S. government is facing historic debt levels.
I’ll remind you of the chart below from analyst Charlie Bilello back in May.
It shows how the U.S. debt-to-GDP ratio recently hitting 116% — and this is obviously before whatever forthcoming stimulus package is passed (last week, we learned that Trump wants “at least $2 trillion” for the next package).
For context, according to the Congressional Budget Office, the highest prior ratio level was during World War II, when it peaked at 106%.
Back to Eric for the tie-in to gold:
Heavy government spending also tends to delight the gold market, as the chart below clearly shows.
Whenever government deficits lurch sharply higher, like they did in the periods from 2001-’03 and 2007-’09, the gold price also moves sharply higher.
Today’s deficit-spending-palooza is just getting underway, and by the time 2020 wraps up, the annual deficit will probably top a mind-numbing $4 trillion.
That’s more than the total debt the United States amassed under its first 42 presidents — a period that spanned more than 200 years. In other words, $4 trillion is a big number, even for a big economy like ours.
That monster deficit creates fertile soil for the gold market, especially now that Chairman Powell is promising to fertilize and water that soil with rock-bottom interest rates until 2023.
***A reminder to keep your eyes on the long-term
Gold will not rise in a straight line.
Beyond that, there will be plenty of gold bears predicting an impending price-collapse. And, in fact, there likely will be declines from time to time.
Your job is to ignore all this, and keep your eyes focused on the long-term, major tailwinds for gold. If you don’t, you risk being shaken out of your position … and potentially missing out on big gains.
To illustrate, let’s revisit our June 6th Digest, which began with …
“We expect a considerable drop in gold prices.”
That was the headline on Monday from Kitco, a popular website that focuses on gold. The article featured analysis from ABN Amro, a Dutch Bank.
In early June, ABN Amro felt the gold trade was “too crowded” so it was looking for prices to drop to $1,575 by the end of June.
At that time, gold was trading around $1,734, so that would have been roughly a 9% drop.
In that Digest, we noted how this was reasonable. After all, at that time, gold had been trading sideways, establishing a wedge pattern.
These wedge patterns often break with an explosive move that can go in either direction.
So, how did this play out?
Well, gold did break out of its wedge pattern … but instead of dropping 9%, it tacked on about 3% as you can see below.
Now, we don’t claim we knew this upside-break was coming. And a 9% drop would have been totally reasonable.
The difference is that had that drop occurred, we would have viewed it as largely immaterial to the potential for longer-term gold gains.
Consider that 9% drop in light of the projections Eric provided above … 17% higher on average one year later … 40% higher on average three years later … 106% higher on average five years later.
Doesn’t seem like an equal tradeoff. That’s why short-term predictions about a selloff don’t worry us.
***No one knows what prices tomorrow will bring, but we have a decent idea what prices the next several years will bring
Which time-frame do you want to focus on?
Here’s Eric from a recent update for the bottom-line takeaway:
Gold has become such a compelling trade in the current environment that it is difficult to walk away from it …
I have never seen a more promising setup for a gold trade in my 30-year career.
To learn more about Eric’s most recent suggested gold trades, click here.
One last note … we’re only 8% below gold’s all-time-high set back in 2011. Once we break through that psychological barrier, it could be off to the races.
Have a good evening,
Jeff Remsburg
