Four Factors that Could Help Sustain a Gold Bull Run

28 Aug 2017

by Peter Schiff, Schiff Gold:

Gold has entered a bull market.

This according to an article in CityA.M., a London business daily.

The authors cite four factors that could help support a sustained gold bull run.

Global Interest Rates Will Stay Low

Despite talk of monetary tightening in the US, interest rates worldwide remain low, and in many cases negative. Worldwide, economic growth remains relatively sluggish. Inflation is not hitting the central bankers’ target. In fact, Jim Rickards recently argued that the Fed won’t even continue with its interest rate normalization.

The Fed will not hike rates again this year. Once the market wakes up to the reality of a prolonged ‘pause’ by the Fed, they will conclude correctly that the Fed is once again attempting to ease by ‘forward guidance.’ This relative ease will keep the dollar on its downward trend and be a boost to the dollar price of gold. The Fed will not hike rates regardless of the strong jobs report. The reason is that strong job growth was ‘mission accomplished’ for the Fed over a year ago. Jobs are not the determining factor in Fed rate decisions today. The determining factor is disinflation.”

Even if central banks do manage to tighten monetary policy a bit in the coming months, a recession will bring a quick return to the status quo  – plunging interest rates and quantitative easing. Peter Schiff made this very point during a recent interview on RT.

At some point, I do expect people to embrace gold. Not necessarily because of the geopolitical aspect, but because of the inflationary aspects, because people realize these fiat currencies  are going to lose a lot of purchasing power, that a lot of central banks are stuck at the zero bound, and even if they raise interest rates slightly, they’re going to lower them back down, and they keep doing quantitative easing. So, I think people will be drawn back to gold for the monetary properties it has had for centuries.”

Simply put, there is no reason to think the interest rate environment will return to “normal.” In fact, there is every reason to believe negative interest rates are in the future. That’s good for gold.

The Dollar Appears to Be Entering a Bear Market

The value of the dollar index, tracking the dollar against six major global currencies, has fallen about 10% since January.

“This type of broad-based decline shows you that it’s really people moving away from the dollar, rather than just moving towards these other currencies,”Sameer Samana, a global quantitative and technical strategist at Wells Fargo based in St. Louis, Missouri, told the BBC.

Why?

In a nutshell, Donald Trump.

The BBC report pointed out that the dollar rallied right after the election based primarily on optimism about Trump’s economic program, including tax cuts, Obamacare repeal, deregulation, and infrastructure spending. But it’s looking increasingly less likely that the president and the GOP are going to get those things done. Peter made this same point in an interview on Fox Business.

The dollar originally rallied because people were confident there was going to be some significant change under Trump. One of the reasons that the dollar surrendered those gains is because nothing has changed. Look, the problem with Trump taking credit for victories he hasn’t won is it’s going to come back and bite him, because he’s setting people up for a lot of disappointment.”

Peter has also predicted that the Fed will ultimately sacrifice the dollar.

Ultimately, the big move in the dollar is going to come when they have to stop raising rates, when they have to admit they are finished tightening, and that they’re going to start easing again, because that hasn’t even begun to be factored into the dollar. Wait until the Fed has to cut rates. Wait until they have to do QE4. I mean, the dollar is losing ground right now when people expect quantitative tightening. They expect the Fed to be shrinking its balance sheet later this year. When the markets are surprised by the Fed having to admit the balance sheet is going to grow even larger instead, I think it’s a long way down for the dollar.”

Chinese Demand

As we reported last spring, Chinese investors are buying gold bars at a torrid rate. China’s appetite  helped drive global demand for physical gold up 9% in the first quarter of 2017. Chinese investors gobbled up 105.9 tons of gold in Q1. That represents a 30% year-on-year increase, and was the fourth strongest quarter on record.

The World Gold Council cited several reasons for surging demand for the yellow metal in China, including weakness in the yuan, falling real estate prices, low interest rates, and good old safe-haven buying.

There’s every indication the demand for gold in China will continue. The World Gold Council predicts Chinese demand will be helped along by technological advances allowing more and more investors to easily buy gold.

Stock Market Set for a Crash

Mainstream analysts have started to express concern about stock market valuations. Even some of the world’s big bankers are worried. The CityA.M. article put it pretty bluntly.

Whichever your preferred metric, historical regression analysis suggests expected returns for equities, from today’s starting point, are very low.”

Peter recently said, “there’s certainly not enough upside potential to justify the downside risk.” He sees a bear market around the corner and doesn’t think the Fed has much of an inclination to step in. He believes the “Yellen”put has probably expired.

The real risk here is this market could go down a lot. We could have a bear market. We haven’t had one in a long time. That’s a 20% decline. Because we’ve had this ‘Yellen put,’ the Fed wouldn’t let the market go down when Obama was president. They certainly didn’t want it to go down before the election because they wanted to put Hillary Clinton into the Oval Office after Obama. So, they had the market’s back. There was this ‘put.’ But what if the put expired with Donald Trump? I don’t know if the Fed has much love for Trump. And now that Trump has put his brand on this stock market and this economy, maybe the Fed is happy to allow a bear market that can be blamed on Trump.”

The folks writing for CityA.M. say this is a good setup for gold.

If we look at history for guidance, then we see gold has the potential to perform very well in periods of stockmarket weakness. Gold’s perceived ‘safe haven’ status is well-supported with hard evidence. For example, if we look back at gold price performance between 1961 and July 2017, it is very clear that gold price annual returns were positive, particularly during periods of high inflation, while stockmarket returns were negative. We see no reason why this relationship should not continue in the future; an argument for holding a minimum weighting in gold or gold equities in a well diversified portfolio.”

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