The first two major gold bull markets were 1971–80 and 1999–2011. Today, gold is in the early stages of its third bull market in 50 years.
How far can gold go during this bull run?
If we simply average the performance of the past two bull markets and extend the new bull market on that basis, we would expect to see prices peak at $14,000 per ounce by 2026.
What specifically is driving the new gold bull market?
From both long-term and short-term perspectives, there are three principal drivers: geopolitics, supply and demand and Fed interest rate policy (the dollar price of gold is just the inverse of dollar strength. A strong dollar equals a lower dollar price of gold, and a weak dollar equals a higher dollar price of gold. Fed rate policy determines if the dollar is strong or weak).
The first two factors have been driving the price of gold higher since 2015 and will continue to do so.
Geopolitical hotspots like Iran, Korea, Crimea, Venezuela, China and Syria remain unresolved. Some are getting worse. Now we have armed conflict between Azerbaijan and Armenia in the Caucasus.
Turkey, a NATO member, backs Azerbaijan, while Russia backs Armenia. While direct conflict between Turkey and Russia is remote, it cannot be ruled out.
Each flare-up drives a flight to safety that boosts gold along with Treasury notes.
The second factor driving gold prices is supply.
Gold’s supply/demand situation remains favorable with Russia and China steadily building up their reserves while global mining output has been flat for at least five years.
The third factor, Fed policy, is the most powerful on a day-to-day basis.
Rates are at zero after the Fed reacted aggressively in response to the COVID-19 crisis. But there’s little chance that the Fed will be raising rates anytime soon, which the Fed itself has admitted.
Meanwhile, debt levels are exploding. Debt was already growing faster than the economy before the lockdowns. Now it’s skyrocketing.
Debt is now at the highest levels since World War II. We’re nearly in the same position on a relative basis as we were in 1945.
Because of the natural deflationary state of the world and the high debt-to-GDP ratio, growth has been snuffed out.
And based on Congressional Budget Office (CBO) projections — which I think are conservative — the debt-to-GDP ratio is going to keep going up.
Last year’s budget deficit was $984 billion. But the 2020 deficit is projected at $3.3 trillion, mostly because of the response to the pandemic. And federal debt is almost 100% of GDP.
Looking further ahead, annual deficits are projected to increase from 5% of GDP in 2030 to nearly 13% in 2050, when federal debt is projected to be an astonishing 195% of GDP.
There is no way out except inflation.
Add it all up and the environment is highly favorable for gold. But if you want evidence that owning gold is probably the best way to guard your wealth, just look at the “smart money.”
I’m sure you’ve seen plenty of billionaire hedge fund managers on business TV or streaming live from Davos. They like to discuss their investments in Apple, Amazon, Treasury notes and other stocks and bonds.
They love to “talk their book” in the hope that other investors will piggyback on their trades, run up the price and produce more profits for them.
What they almost never discuss in public is gold. After all, why have gold when stocks and bonds are so wonderful?
Well, I worked on Wall Street and in the hedge fund industry for decades. I also lived among the players in New York and Greenwich, Connecticut, at the same time. I’ve met the top hedge fund gurus in private settings. And here’s the thing:
I’ve never met one of them who does not have a large hoard of physical gold stored safely in a nonbank vault. Not one.
Of course, they won’t say so on TV because they don’t want to spook retail investors into dumping stocks and bonds. But watch what they do, not what they say.
If gold bullion is the go-to asset for billionaires, why don’t small investors have at least a 10% allocation to gold and silver bullion?
Some do, but most don’t. They’ll find out the hard way what individuals have learned over centuries and millennia:
Gold preserves wealth; paper assets do not.
The world is obviously not on a gold standard.