Sprott's Rule: Trade War Will Drive Gold Over $1,400

Rick Rule, CEO of Sprott U.S. Holdings, and a commodity veteran who has been in the market for over 40 years, thinks a trade war could finally push gold over the $1,400/oz. level, Bloomberg reported this morning

One of the biggest surprises throughout the last couple months of stock market volatility has been the lack of a serious and consistent bid underneath the spot price of gold. Traditionally, investors will flock to gold as a hedge against the system or hedge against inflation but, even as the VIX has spiked several times over since the beginning of 2018, gold has yet to find a serious inconsistent bid.

Experts in precious metals like Peter Schiff have predicted that $1400/oz for gold will catalyze a breakout. For gold spot, it has certainly been a struggle to gather any momentum on a consistent basis over the last couple of months.

However, Bloomberg published a report early this morning citing Rick Rule, who believes that $1400 per ounce could easily happen if the US is put into a trade war situation that it is increasingly looking like we are getting near:

Gold will surge to the highest level in five years if a global trade war breaks out, according to Rick Rule, chief executive officer of Sprott U.S. Holdings Inc., who’s been involved in the market for four decades.

Bullion could top $1,400 an ounce in 2018 as escalating trade tensions drive investors to havens and the three-decade bull market in bonds nears an end, said Rule, who’s due to speak at a conference in Hong Kong on Wednesday. Spot gold traded at $1,337.50 Tuesday after three straight quarters of gains, while exchange-traded fund holdings are around the highest in half a decade.

He then said that "In the 40 years I’ve been involved in the gold market, the most important determinant of the gold price has been international confidence in the U.S. dollar and in particular, the U.S. dollar as expressed by the U.S. 10-year Treasury," according to a March 29 interview.

"The fact that the U.S. seems to be bound to engage in a zero-sum trade war has begun to strike people as something that’s bad for everybody in the world, not just the U.S. The potential for a winnerless trade war certainly gives cause to some concern." Some more of Rule's considerations:

The aggregate federal, state and local debt in the U.S., both on balance sheet and entitlements, relative to levels of savings and investments in the economy, will contribute to worries over the longer-term purchasing power of the dollar, particularly in view of low current yields, Rule said. Rising income and savings in Asia, a region with a disposition for gold buying, could also lead to more demand, he said. Sprott U.S. Holdings is a subsidiary of Toronto-based Sprott Inc., which had C$11.5 billion ($8.9 billion) under management as of Dec. 31.

It is obvious that Rule's reasoning for a potential sharp rise in gold is far more centered around inflation and a potential loss of confidence in the dollar than just overall stock market volatility.

As we discussed two weeks ago, the "decision point" for gold could be forthcoming and the demise of the dollar could finally be on the horizon: Russia and China are increasing their reserves and the US dollar is backed by nothing but "confidence" and $123 trillion in debt:

Other countries are now faced with a choicewhether to keep and to add to their gold reserves or hold on to the dollar, which is backed with $123 trillion in debt.

China and Russia aren’t the only countries increasing their gold reserves. The Hungarian National Bank (“MNB”) has 3 tons of gold, valued at $130 million, stored in London. It has decided to return this gold to Hungary. Other countries are following Hungary’s example as they restore and replenish their gold reserves. Germany’s Bundesbank has recalled $28 billion of their gold reserves formerly stored in New York and Paris.

Is the US getting nervous? US Treasury Secretary Steven Mnuchin made an almost unprecedented and very public visit to Fort Knox, where $200 billion worth of gold is stored. “It’s still here,” Mnuchin joked. Or was he simply relieved? Gold has is becoming more important globally than ever. We may see another “gold rush,” and that does not bode well for the US dollar.

 

A couple things are certain: with each passing day we get closer to that critical test of how much global confidence there truly is in the reserve currency; meanwhile this 40-year market veteran's opinion is worth considering and it now appears that for Gold bulls the $1400 level will be critical; once it breaks, it could well be the catalyst that unleashes the demand that pushes gold back on the path toward its all time highs.