Two years ago, when gold was hovering at the $1,200 range, the idea of gold surpassing $1,700 seemed like a pipe dream to many investors.
Remember, August 2018 marked a 5-month period of intense selling pressure.
Nobody wanted gold, from what we remember, except for major financial institutions, central banks, and a handful of smart investors.
Week after week, we kept emphasizing that “now” was the time. Some investors listened.
But overall, few investors pulled the trigger.
Fast forward to now.
Fundamental data indicates another massive rise, as high as $3,000 per ounce, according to Bank of America.
What’s going on in the gold market? Well, two things, really: financial repression and supply shortages. Let’s start with the first.
Financial Repression and Its Effect on Gold
Most investors aren’t familiar with the term “financial repression.”
Quoting wikipedia for a general definition, it refers to "policies that result in savers earning returns below the rate of inflation."
In other words, it’s pointless to earn yield if it can’t do better than break even with inflation. It would be like earning zero--better than negative income, but still, no real income at all.
But let’s get back to this repressive scenario. Why do it?
The aim of financial repression is to allow companies and governments to benefit from “cheap loans” with a significantly-reduced repayment burden.
Naturally, this crushes yield and erodes purchasing power.
On that note, Bank of America analysts predict gold--the only “true” safe haven--to reach a lofty record by October 2021--as high as $3,000 per ounce, according to a MarketInsider report.
"Beyond traditional gold supply and demand fundamentals, financial repression is back on an extraordinary scale," says Bank of America strategist Michael Widmer.
With a looming recession on the horizon, central banks are prepared to ramp up their purchases of financial assets to record amounts.
In short, they’re ready to double the size of their balance sheets.
Just last month, we saw G7 central banks buying close to $1.4 Trillion in assets to buoy the markets.
But their attempts to reinflate the markets will only cause currencies to strain and eventually buckle, driving interest toward gold.
A good thing? Sure. But let’s talk about that interest in gold.
Specifically, how much gold will be there once interest in the yellow metal surges to even greater heights?
Gold Already in Short Supply
According to a recent Wall Street Journal report, investors and bankers are having a tough time finding physical gold. Dealers are largely sold out.
Even Credit Suisse Group AG, a company that has minted its own bars since the mid-1800s, has told clients “not to bother asking,” notes WSJ.
In addition to supply shortages, there are transportation disruptions: “In London, bankers are chartering private jets and trying to finagle military cargo planes to get their bullion to New York exchanges.”
Unable to access adequate supplies of physical gold, Wall Street is looking to the Royal Candadian Mint for help, asking them to ramp up gold bar production.
The current surge in gold prices are partly attributable to this depletion in supply.
All of this points to one primary fact…
Gold Is the Only Money That Can’t Be Printed
From December 2019 to March 9, 2020, gold saw a surge of 17%.
Then COVID-19 roiled the markets, and strangely, gold prices plunged nearly -15%.
It took less than two weeks for the smart money and institutional investors to seize this fear-driven opportunity, sending gold prices skyrocketing 23% to a high of $1,788.80 in COMEX prices.
We can assume that those who sold were driven by popular sentiment.
Those who held steady or bought gold were clearly seeing the fundamental writing on the wall--namely, that supply shortage and financial repression would see no other direction for gold than up.
Gold is the only money that can’t be printed. And when you need it the most, such as now, if there isn’t enough of it around, then prices will surge.
The surge isn’t over. More economic pain, possibly long-term pain, is coming.
At least, that’s the safest bet. Like gold, but this time with regard to the economy, the writing is on the wall.
Gold at $3,000? Perhaps a bit less or perhaps more. We can’t predict prices. But anyone who’s aware of what’s going on can see the dismal economic data streaming in.
And anyone who’s paying attention to what’s happening with monetary policy across the globe can easily tell that its effect on currency is dangerously negative.
Gold’s the only antidote, safe haven, and hedge.