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BFI Bullion
June 26, 2018

Y? Series – Why Will Gold Prices Rise?

Gold reached its all-time high in USD terms on August 31st, 2011, at a bullion spot price of $1,828/oz. It declined until the end of December 2015, when it reached a low of $1,060 /oz. Since then, it has risen to the current price of around $1,300/oz. However, over the past few weeks, gold’s performance has been underwhelming. Why should it rise from here?

That’s a fair question we might even reformulate to ask, “How can gold still rise despite all the headwinds?”

Gold has been moving sideways

Bullion prices have been stuck in the doldrums for most of this year, as the outlook for higher borrowing costs dimmed prospects for the metal. As we write this post, the gold price has dropped a few notches in response to last week’s announcement by the U.S. Federal Reserve of more interest rate increases this year.

Overall sentiment toward gold has been oscillating between minimal confidence and complete disinterest. Geopolitical risks that previously supported gold prices, appear to be fading after President Donald Trump met with North Korean leader Kim Jong Un. The U.S. economy is stronger than expected, which leads to expectations of a stronger dollar. Even the rising trade tensions between the U.S. and China (and the rest of the world.…), which sent equities and bond yields tumbling last week, failed to stir an uptick in the gold price. ETFs have been under some considerable pressure as well: Holdings in iShares Gold Trust, the second-largest bullion-backed ETF, shrank by about half a million ounces (or 6%) in the past five weeks.


Why should I invest in gold then?

Regardless of the ever-changing focus of the daily news cycles, the overall big picture hasn’t changed and still supports the case for higher gold prices. Accelerating U.S. inflation is one reason to remain optimistic on the metal’s outlook. The U.S. consumer price index rose by 2.8 percent in May from a year earlier; that’s the fastest pace in six years. The latest corrections are short-term “knee-jerk” responses. The fundamentals that drive the gold price are firmly in place and make an increasingly compelling case, as a solid foundation for the next leg in the bull market for gold is being laid.

What really helps drive gold is the growing mountain of unsustainable debt, especially when inflation runs hotter and faster than the nominal interest rates. Inflation expectations are projected to rise further in the coming months and the brewing trade war between China and the U.S. would likely serve to intensify them.

Moreover, despite the generally positive news from the United States, uncertainties still abound in the rest of the world. Europe is still not out of its credit crisis. Cracks are beginning to show across the old continent, with Italy’s woes at the forefront of many worried investors’ minds (you will be able to read more about that in our upcoming Digger Quarterly). Emerging markets also appear under pressure amid an investor exodus, even from Asian economies with solid prospects for growth and debt financing.

Do you know anything about history?

Gold does stir emotions. After over 5,000 years of conditioning, the traditional faith in and acceptance of gold as a protector of value is deeply-rooted around the world. It is not merely another commodity. During this era of monetary and fiscal profligacy, negative interest rates and the “financial engineering” that comes with it, prudent investors cannot afford to ignore precious metals, and gold in particular, as one of the core wealth preservation asset classes.

As George Bernard Shaw once said: “A choice must be made between the natural stability of gold and the honesty and intelligence of the members of government – with all due respect for these gentlemen, I advise you, as long as the capitalist system lasts, vote for gold.”

Human history is full of financial crises, economic collapses and currency disasters, current times included. Historically, gold has served as a refuge in times of trouble. Ultimately, we have to look at the big picture and ask whether the current “paper-and-promise-based” financial system is sustainable.

Last but certainly not least, it’s also worth pointing out that a low market sentiment towards gold, along with a price pattern that moves sideways, is a wonderful contrarian indicator. Remember, the time to buy is when the price is low – not when it skyrockets and everyone else is buying.

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