The 3 Catalysts Behind the Coming Gold Rally

As share prices climb from record high to record high, investment gains are piling up quickly and effortlessly.

Gold nuggets on top of American paper money representing gold stocks

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The stock market is making geniuses of us all!

But even as we savor our successes, we must also consider what may be coming next.

Most likely, the fundamental trends that are propelling tech-focused stocks to new heights will continue strengthening over the months ahead and power these stocks to even higher highs.

But a few stock market laggards also deserve our attention.

That’s why I am now predicting that the lagging gold market is offering the most promising opportunity of 2021.

Although gold has been slumbering for the last several months, it may be reawakening soon, thanks mostly to what the chart below shows.

In mid-December, the U.S. Dollar Index (DXY) touched a new two-year low. A weakening dollar is good news for gold.

For example, the gold price jumped 20-fold during the 1970s — a period when the Dollar Index slumped 30%. Two decades later, as the Dollar Index was tumbling 40% between 2001 and 2011, the gold price rocketed more than 600%.

Moving to recent history, the Dollar Index topped out at the end of 2016 and has drifted 12% lower since then. Over that identical time frame, the gold price has advanced 60%.

If the dollar’s downward trend gains momentum, the gold price should continue trending higher, perhaps a lot higher …

The Three Catalysts Behind Gold’s Next Rally

While the weakening dollar is the most compelling reason to consider fresh investments in the gold sector, two additional gold-friendly trends also are gaining strength.

First, the federal deficits here in the United States are surging to titanic levels. Second, the volume of negative-yielding bonds around the world is surging to titanic levels.

Both of these macroeconomic factors tend to promote a rising gold price.

The U.S. federal deficit — the amount of money the government borrows and spends in one year — has rocketed to the highest level since World War II.

In relation to GDP, the U.S. deficit during the last 12 months has soared to 15% of GDP. That’s nearly off the charts.

This deficit is so large that it would share the stage with the nation’s massive wartime deficits of World War I (17% of GDP) and the American Civil War (11% of GDP).

But in times past, much smaller deficits than these were still large enough to spark a gold rally.

In the 1970s, a decade of deficit spending helped stoke a soaring inflation rate that produced a monster gold rally. But even the largest of those ancient deficits never topped 5% of GDP.

A few decades later, the massive fiscal exertions of the 2008-’09 crisis produced deficit spending equal to 10% of GDP. Although these deficits produced little inflation, the massive quantitative easing (QE) operations of that period set off a major gold rally.

Big, fat deficits often beget rising inflation, which usually triggers the gold-buying impulse. That’s because massive government spending always leads to some form of money printing, which is the thing we call inflation.

In times past, the U.S. government would be coy about money printing — but no more.

These days, the government runs its printing presses in broad daylight, extolls them as sophisticated monetary tactics, and adorns them with elegant names like “quantitative easing.”

So no one should be shocked if the upcoming inflationary trend becomes larger than expected.

This new inflationary trend may be underway already. According to the United Nations Food and Agricultural Organization’s monthly index, global food prices rose 6.5% from a year ago in November — hitting a new five-year high.

Likewise, the Bloomberg Agriculture Spot Index has jumped more than 30% since May and recently touched a new six-year high.

Food prices represent only 14% of the overall Consumer Price Index (CPI) calculation, but they are an important and telling input. If food prices are rising, genuine “Main Street” inflation is on the rise.

And prices could soar even higher because of pent-up demand. We Americans have been hanging out in our houses for so long that we might go a little crazy once the lockdowns end.

The travel industry is one likely beneficiary of pent-up demand. If Americans start flooding airports and hotels to “catch up” on deferred travel, prices in that industry could quickly lurch higher. In other words, a return to “normal” could produce a surprisingly large jump in consumer prices.

Moreover, if inflation materializes, will be given a long leash by both the Federal Reserve and Congress.

For more than a decade, the Fed has been fighting against deflation, not inflation.

Similarly, members of Congress no longer fret about massive government deficits. On the contrary, most politicians believe deficit spending can cure a wide variety of economic ills.

In other words, both monetary and fiscal orthodoxy are a thing of the past. The Fed doesn’t care about inflation, and politicians don’t care about deficits.

Negative interest rates are providing additional fuel for a great, big gold rally …

$31 Trillion Worth of “Crazy”

At a recent glance, an all-time record $17.9 trillion in global debt is priced to yield less than nothing, up from less than $8 trillion in March. Interestingly, $17.9 trillion is almost exactly the current value of all the gold in the entire world.

Those figures grow far larger when accounting for the measured rate of inflation. According to analysts at JPMorgan, the total stock of developed nation sovereign debt sporting a negative real yield — i.e., the yield minus the inflation rate — now tops $31 trillion. That’s double the reading of two years ago and equivalent to more than three-quarters of total developed nation sovereign debt!

This isn’t fake news: More than 75% of government bonds around the world are paying zero interest. Instead, these bonds charge you to hold them.

Crazy, right?

That’s $31 trillion worth of “crazy.” So it’s not a stretch to imagine that some portion of the world’s bondholders might shift some of their capital from negative-yielding bonds to zero-yielding gold.

Zero is better than negative, after all.

Despite these trends, gold prices haven’t gained much ground since August. But let’s not forget that gold soared 60% over the preceding two years — far outpacing the S&P 500’s 20% gain over that period.

So gold was due for a rest … just like stocks were due for a rally.

Further, every financial asset on the planet has been rocketing higher during the last few months. In bullish markets like these, gold often takes a snooze.

While nothing is guaranteed, the gold market clearly possesses plenty of fuel for a major new rally in 2021.

The chart below provides a taste of what could be in store for gold. I’m not predicting gold will top $7,000 an ounce during the next three years. But if gold racked up the same percentage gains it did during the 2006-’11 rally, it would top $7,000 an ounce by early 2024.

There are several ways to play this market, including picking up some physical gold and silver bullion itself (or through a precious metals fund).

While I believe the Technochasm stocks we usually focus on here will keep hitting new heights in 2021, I’m making one gold-focused stock my No. 1 pick for next year — and my entrant in the Best Stocks for 2021 contest.

I’ll reveal the name of that stock — and tell you its full story — in my New Year’s Eve column on Thursday.

I’ll see you back here then.

On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south.

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