Gold is knocking on a new all-time high … the macro forces pushing it higher … how trend will continue driving it …
Gold is flirting with an historic breakout.
Yesterday, the precious metal passed the psychological milestone of $1,800, climbing as high as $1,816.
As I write, Thursday morning, it’s trading at $1,811. That puts it a short 6% below its all-time high of $1,920 which it set back in September 2011.
We believe this is the beginning of a major, multi-year gold run that’s being driven by both macroeconomic forces and trend.
Today, we’ll dive into those details. But let’s just cut to the bottom line for anyone in a hurry …
***Buy gold
The macroeconomic forces of 0% interest rates, massive sovereign debt, and a weakening dollar have paved the way for a huge gold run.
In past Digests, we’ve dug into the following in detail, so let’s just hit the high-points.
As you look at the world today, do you see higher interest rates anytime soon?
No. The Federal Reserve has signaled it’s going to keep target-rates at zero through 2022.
Meanwhile, since the beginning of March, the world’s central banks have cut rates 37 different times, and rate hikes aren’t on the horizon.
Beyond the rate-cuts, the Fed has unleashed a “bazooka of liquidity” on the economy — in other words, a torrent of newly-created dollars backed by no actual source of value.
And more phantom dollars will be coming …
In May, the House passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, calling for another $3 trillion in stimulus. That’s too much for the Senate and White House. But consensus is building in the $1 – $2 trillion range for the next round. It will likely be passed before Congress goes on recess in August.
We’ve seen similar spending explosions from other global central banks …
Governments around the world have unleashed at least $15 trillion of stimulus via bond-buying and budget spending. The most recent is the U.K. which just announced this week up to $38 billion in additional stimulus.
Overall, experts predict that in 2020, we may see the global debt-to-GDP ratio rise to 342%.
***Bottom line, interest rates are pegged to the floor, and global governments are drowning in debt
Here in the U.S., our debt-to-GDP ratio recently hit 116% according to analyst, Charlie Bilello.
For context, according to the Congressional Budget Office, the highest prior ratio level we’ve seen was during World War II, when it peaked at 106%.
And obviously, we’re hitting this level before whatever next stimulus package is passed, which will only drive the ratio even higher.
So, we have massive global sovereign debt — very bullish for gold … and 0% interest rates stretching out to the horizon — also very bullish for gold.
***What about the dollar?
To make sure we’re all on the same page, the relative strength of the dollar can impact gold’s price.
To illustrate, when the U.S. dollar is weaker, it means investors have to spend more dollars to purchase the same goods that required fewer dollars back when the dollar was stronger.
So, tying in gold, when the dollar weakens, more of those dollars are needed to buy the same amount of gold (all else equal). This puts upward pressure on gold’s market price.
So, what’s happening with the dollar today?
Below, you’ll see a chart of the U.S. Dollar Index. It tracks the value of the dollar against a basket of major foreign currencies.
As you’ll notice, the dollar spiked back in the chaos of March’s stock-market lows.
This makes sense. In troubled times, all sorts of companies, banks, and individual investors want to hold the dollar. After all, it’s the world’s reserve currency and is still considered the safest currency.
But if everyone wants dollars, then from a basic supply/demand perspective, the value of those dollars is going to increase … which is what has happened.
But notice what’s been happening to the dollar since then …
This weakening dollar is bullish for gold.
So, from the macroeconomic perspective, we have the trifecta of 0% interest rates, massive sovereign debt, and a weakening dollar all aligning for higher gold prices.
But let’s now turn to what may be the “kerosene on the fire” in the coming months.
***Don’t fight the trend
The investment classic, Market Wizards, by Jack Schwager contains a series of interviews with some the greatest traders of the modern era (think Richard Dennis, Ed Seykota, Paul Tudor Jones).
You find two themes repeated throughout these interviews …
One, the majority of these world-class investors made their mind-boggling fortunes through a trend-following approach to the markets.
Two, you never fight the trend.
The reason behind the second point is simple — when the trend is in, there’s simply too much momentum powering its direction. Trying to fight that direction (or outsmart it) is a great way to go broke.
I’m reminded of advice from a lifeguard many years ago, speaking about what to do if you get caught in a riptide while swimming in the ocean.
The advice was to never attempt to swim back to shore while in the riptide. You’d be fighting against the momentum of the surge, which would overpower even the strongest swimmer, leading to exhaustion.
Instead, try to swim parallel to the shore. Eventually, you’ll escape the riptide channel, and at that point you can swim back to land. But until you reach that point, you never fight momentum.
Right now, gold has deep-current bullish momentum … only this is a surge that we want to be caught in.
***The psychology of gold’s momentum
How do you put a price on an asset?
With stocks and bonds, we can look to various valuation metrics. Think a price-to-earnings ratio, or some sort of cash flow-to-price ratio, like a dividend or bond yield.
These metrics help give investors a feel for how much they’re paying relative to some objective measurement of value.
Gold offers no such earnings or cash flows yardstick.
So, what moves the price of gold then?
Sentiment.
Investors rotate in and out of gold based on how they feel.
These feelings often relate to the macroeconomic factors we addressed earlier. But there’s an additional sentiment-driver we need to include at this point …
Fear of missing out, or FOMO. And this FOMO has a way of building on itself, creating and powering a trend.
***Here’s a prediction tying this together
Gold faces some short-term technical challenges today which could mean some selloffs and volatility. But within the next three months, it will set a new all-time high.
At that point, the media will be filled with headlines about the new record … the start of a new, gold bull market … various gold mining stocks enjoying double and triple-digit gains …
The articles will make some of the same points we’ve made here in the Digest … gold is a wonderful storehouse of wealth during times of geopolitical instability … U.S. debt levels are unsustainable, which threatens the health of the dollar … gold is a great defense against the possibility of hyperinflation …
As the broader population slowly becomes aware of all this, we’ll see a new host of investors piling into gold.
Some will buy for the long-term. Others will be more like day-trader, Dave Portnoy, who we profiled recently, looking to make a quick buck.
Either way, this flood of new dollars will drive prices higher. Higher prices will attract more investors. More investors will drive the price higher … the trend will surge …
***Best of all, what this means is that, despite the gains we’ve seen in the last 12-18 months, it’s still early
Consider the last two major gold bull markets …
In the 70s, gold climbed 1,755% from December of 1969 from through September of 1980.
In the 2000s, gold tacked on 611% from August 1999 through August 2011.
As I write, gold is up just 72% from its low in December 2015, with most of those gains coming in just the last year-and-a-half …
In other words, if we’re starting a new multi-year bull, we’re still in the early stages.
***So, how can you play this?
The easiest, most traditional way is an ETF such as “GLD,” which tracks the market price of gold.
We first put GLD on your radar in the January 9th 2019 Digest titled, “There’s a Stealth Bull Market in Gold. Are you Missing It?” Since then, the ETF is up 41%.
But there are more explosive ways to play it.
For example, Eric Fry, who is InvestorPlace’s global macro specialist, holds gold plays in his Speculator portfolio.
There’s a mining play, up 69% in not even three full months.
Then there’s another mid-tier gold miner, ranking among the top 20 gold mining companies in the world. It’s up 117%.
A third is up 136% — since just mid-March. It’s another miner benefiting from gold’s move, as well as another in-demand metal.
To learn more about Eric’s plays as a Speculator subscriber, click here.
Bottom-line: if you don’t have exposure to gold in some form, please take a look at getting some today. Forces are aligning for a major run.
Have a good evening,
Jeff Remsburg
