Gold has been forming a resilient base at the $1,200 range over the last three months. And in the last month, gold looks poised for a major breakout.
How high might gold prices go over the next 12 months? Try $1,325 and $1,350.
Those are the target points that both Goldman Sachs and Bank of America Merrill Lynch are anticipating.
Such a move would challenge gold’s January 2018 highs; quite a distance from its $1,160 low, perhaps the steepest downturn we’ve seen since 2013.
But you’re probably wondering, what are the factors that impelled BofAML and Goldman to make such a call?
Three things: first, the current tariff-driven trade war; second, US budget deficit which is continuing to widen at an increasingly rapid pace; and last--the factor that may trigger gold’s rise--the Trump tax cuts.
All three are seen as factors that can do damage to the US economy.
But this flies against the face of what we are currently witnessing. The fact is that the US economy is performing well, exhibiting signs of stability if not strength.
BofAML would agree. But they see this as a short-term phenomenon. Their long-term projection is quite different, perhaps drastically.
According to BofAML’s head of global commodities, Francisco Blanch, “In the short run, the effects of a strong dollar, higher rates dominate. But in the long run, a huge U.S. government budget deficit is pretty positive for gold,” as the deficit becomes the dominating factor.
You know as well as anyone that tax cuts can be a positive force in the economy, given that federal spending is also curtailed.
But when tax cuts are combined with continued federal spending, the economic results can be disastrous. And that’s what we’re seeing.
According to the Congressional Budget Office, current spending combined with the tax cuts will push the budget deficit to $1 trillion by 2019-2020.
Bear in mind that it took 193 for the US to amass its first $1 trillion in debt. Now, amassing $1 trillion in debt will take only 1 fiscal year.
The tax cuts will lower the government’s revenue base, forcing the Treasury to borrow more, in turn putting pressure on rates.
But how long do you think the Treasury can continue doing this? According to BofAML, not much longer. You can’t continue borrowing in order to service your debt obligations.
And what will happen when the next downturn hits? The US might not be able to borrow its way out once again. And if it does, what do you think the costs will be this time around?
With trade war concerns roiling the markets, the next bear is all but guaranteed.
As of this writing, the Dow’s decline had just wiped out the entirety of its 2018 gains.
And with gold breaking out of its trading range, though still at value levels, it wouldn’t be an unwise decision to start loading up on gold, whether to hedge your portfolio, to seek growth, or to preserve your purchasing power for the long run.