Gold’s reversal from all-time highs … the factors behind recent weakness … why Eric Fry sees big gains returning for the yellow metal

 

First, an apology …

Yesterday, we planned to publish the Digest at 2 p.m. ET. In it was a reminder to join Louis Navellier for his Moneyball Multiplier Challenge event at 4 p.m. ET.

Unfortunately, due to a technical outage, the Digest published beyond its intended time. Given this, readers might have felt puzzled seeing a reminder to join an event that had already taken place.

If you were among that group, apologies for the confusion. But the good news is you can watch a replay of the entire event by clicking here.

If you’re looking to shore up your retirement finances, or simply grow your nest egg, tune in to learn how Louis’ “quant” strategy can help.

Now, onto today’s Digest …

***So, what happened to gold?

 

After setting a record-high in early August, the precious metal fell prey to a bear attack.

Below you can see it dropping 8% since its all-time high, nearly two months ago.

 

 

What are we to make of this?

Is it just a temporary pullback within a long, climb upward? Or is this just the first leg down in a longer correction?

Well, regular Digest readers know that this bear attack wasn’t much of a surprise.

Given the yellow metal’s meteoric rise over recent months, we’d been recommending investors prepare for a pullback. After all, healthy rallies need pauses to digest their gains.

But a near-10% pullback from top-to-bottom has been a larger dip than many expected. So, has gold’s bright future dimmed at all?

Today, we’ll hear from our global macro specialist, Eric Fry.

In the past, he’s gone on record as saying that he expects gold to double within the next two-to-three years.

So, today, let’s find out if that forecast is still in the cards.

***The driving force behind recent gold weakness

 

For any newer Digest readers, Eric is our global macro specialist. This means he evaluates markets and asset classes from a big-picture perspective to identify attractive opportunities.

Once something is in his crosshairs, he digs down to find the right, specific investment to play the opportunity.

It’s been an effective strategy …

In his decades in the business, Eric has dug up more 1,000%+ gaining investments than anyone we know of in the newsletter industry.

In recent months, he’s combined his strategy with gold to help his subscribers generate a slew of triple-digit returns, many of which we’ve profiled here in the Digest.

So, returning to gold’s recent weakness, what dynamic does Eric see as being responsible?

Dollar strength.

If you’re less familiar with this relationship, the dollar and gold tend to move in inverse directions.

As the dollar loses value, it requires more of those dollars to purchase the same quantity of gold as before — driving up gold’s price.

On the other hand, when the dollar strengthens, it requires fewer dollars to purchase the same gold, which tends to push gold’s price down.

You can see this inverse relationship in the chart below.

It shows the U.S. Dollar Index and the price of gold since early August. Note how they move in loose, mirror-image opposition to one another.

 

 

In Eric’s update from Tuesday, he wrote that while the dollar might have won this latest battle, it won’t win the war.

In explaining why, he begins by traveling back to the financial crisis of 2009.

In February of that year, gold set a new record high. Now, that makes sense — the stock market was imploding at the time so investors funneling money into the safe-haven of gold is logical.

Yet within three months of gold’s highwater mark, stocks had rallied 30%.

With stocks back on track, gold’s gains should have evaporated, right? It would make sense that investors would rotate out of safe-haven assets, back into riskier assets, like surging stocks.

It didn’t work that way.

Instead, gold went on a massive run.

Here’s Eric to explain why:

Federal Reserve Chair Ben Bernanke’s quantitative easing program was simply a new twist on an old tactic called “money printing.”

As such, this program undermined the dollar’s value to some extent and boosted the value — and appeal — of gold.

Even though the gold price was trading near a record high in early 2009, it would double over the next two years.

 

 

So, even though the fear-based reason for owning gold disappeared, the monetary policy of the Fed had provided a sustained tailwind that drove gold’s price higher for years.

***Eric writes that part of gold’s recent, new all-time high is attributable to similar, aggressive money printing

 

In fact, under Federal Reserve Chair Jerome Powell, our own central bank spent $2 trillion in just five weeks in late April and May. Eric calls this “2009’s QE on steroids.”

We saw how much gold’s price climbed the last time there was a binge of QE. What’s unclear is what a vastly greater amount of QE will do this time for gold … and “down” isn’t the likely answer.

But what about recent dollar strength? And will this strength continue to weigh on gold?

Back to Eric for that answer:

The dollar may have bounced on news that fiscal stimulus from the U.S. government is stalled thanks to political gridlock, but neither side of this political fight has walked away from the negotiating table yet.

Another round of deficit spending could supercharge the gold rally, pushing it toward $3,000 per ounce — maybe even before 2020 ends.

So, while this pullback isn’t enjoyable to sit through, a prolonged season of deeper declines isn’t likely.

***For another reason why, let’s turn to negative real interest rates

 

At this point in his update, Eric pivots to negative interest rates, writing “the Federal Open Market Committee slashed the overnight interest rate to near zero in March, which means interest rates here in the United States have dropped sharply.”

Now, it’s important to understand the difference between “nominal” and “real” rates.

The nominal rate of return is the face-value rate that investors earn on an asset. This is different than the “real” rate of return, which subtracts inflation from the nominal rate.

The real rate is what matters since inflation has a very real impact on the purchasing power of your dollars.

Back to Eric:

… every Treasury security, from the three-month T-bill to the 30-year bond, is paying a rate of interest that is less than the inflation rate. That means these securities are paying negative real interest.

This isn’t likely to change anytime soon … …

even after inflation rises slightly above the central bank’s 2% target, we won’t be seeing a bump in interest rates.

Eric goes on to suggest that real interest rates could be negative for a long time, too. That’s because the Fed’s September economic projections showed a near-zero federal funds rate through 2023.

So, let’s jump straight to the takeaway from Eric:

Only three times in the last 40 years has the 30-year yield fallen below the inflation rate. And in each case, a powerful bull market in gold followed.

Eric writes that the last time the 30-year Treasury bond paid a negative real interest rate was in July 2008. At that time, gold price was hovering around $900 an ounce.

Just three years later, it had doubled to more than $1,800.

As we wrap up, yes, gold’s recent pullback has been notable … but no, it does not derail its potential for long-term gains.

Here’s Eric with the final word:

Short term or long term, gold, the ancient asset, is going to be bullish, and the recent dip doesn’t change that.

Have a good evening,

Jeff Remsburg