We are staring at a nascent but potentially and probably startling increase in the price of gold and precious metals mining stocks and warrants. Gold will reach mind-boggling levels because the actions of our political leaders and their academic and credentialed enablers are virtually guaranteeing it with their current actions.
Currency Traders Strengthening Price of Gold
The US dollar has and continues to be pummelled by currency traders because they see the US Treasury and FED working overtime to deliberately devalue the dollar in response to politicians who think that spending money the country doesn't have on programs it doesn't need is the answer to the continuing economic malaise. Setting interest rates at near zero percent obviously exacerbates the dollar problem.
Carry Trade Supporting Price of Gold
The dollar has now replaced the Japanese Yen as the favoured currency of the carry trade. Borrowing US dollars at nominal interest rates is the hedge fund manager's most obvious go-to strategy. Currency traders will be most reluctant to allow a sudden rise in the US dollar to cut the legs from beneath the carry trade of which they are participants. Consequently, there is little reason to think a rise in the US dollar will interfere with the consistent and persistent rise in the price of gold.
Supply and Demand Ratio Increasing Price of Gold
Couple these currency issues with the limited supply of above-ground gold and the fact that mine production has been reducing year over year and the inevitable consequence is demand exceeding supply resulting in gold being bid to ever higher prices.
Loss of Safe-Haven Status for U.S. Dollar Supporting Price of Gold
Perhaps the most significant new factor in the gold price equation is that the US dollar is no longer perceived as the automatic safe haven harbour for concerned investors around the globe. While this statement cannot be made definitively, the fact is we are already a long distance from the fall of 2008 when global investors reflexively flocked to the US dollar as a safe haven in the face of the global financial turmoil.
Increased U.S. Budget Debts Strengthening Price of Gold
Needless to say, scepticism about the merits of the dollar mounts monthly. The actions of the US administration and Congress place it on an unprecedented spending binge organized by the Treasury and FED which dishes out vast quantities of new digital dollars designed to mop up the flood of new and maturing debt.
This revolting process is causing foreign central banks to rapidly lose their appetite for US Treasury bonds. The expanded FED balance sheet coupled with monetizing debt inherent in quantitative easing is the boogeyman of international finance.
Increased Investment Demand Maintaining Price of Gold
That leaves us with gold, the only safe haven refuge of undisputed value. It is real money, and everyone knows it instinctively. That is why many foreign central banks are quietly and actively accumulating it. Investment buying, especially by the big money players as represented by central banks, sovereign wealth funds and leveraged hedge funds inevitably spring into the purchase mode whenever price weakens, even modestly. They provide a floor price for the metal on its inexorable trek northward.
This means you and I can invest with confidence knowing that major pullbacks almost certainly will not happen. Moreover, if and when they occur, it will be purely a very temporary, brief and shallow phenomenon.
How high will precious metals equities and the gold price go?
My sense is that it will be in orders of magnitude far greater than most analysts allow themselves to state or believe. We frequently see price projections of 20 or 50 percent higher than today.
Some even allow themselves to suggest that gold will double in price before it has reached its cycle high. We may even see a rare analyst allow himself to speculate that gold prices may find and end at the $3,000 an ounce level. Of course a few discredited gold bugs suggest numbers even greater.
So why am I so optimistic about the eventual price of gold?
It is because an affinity for and an understanding of the political mindset causes me to understand what decision makers will do...and why. Because a politician follows the political calendar, s/he only concerns himself/herself with the time horizon leading to the next election.
Anything requiring decisions beyond the date of the next election will be the responsibility of whoever is on the next watch. If the politician in office today is in office after the next election, a shrug of the shoulder indicates that worries of that kind can be dismissed for now to be dealt with later.
So major and difficult, but necessary, decisions are inevitably deferred. In their place spending money gives the appearance of concern and of doing something to fix the apparent problem. Aren't those elected officials doing what we elected them to do? It certainly looks as if they are. More cynical observers would characterize these actions by the political class and their senior bureaucratic minions as buying time hoping that something positive might magically emerge.
Those who are super cynical would even conclude give-away programs are designed simply to bribe the voters in order to curry goodwill for another term at the levers of power.
What all this means is that there is no discipline or inclination to do anything of real value in fixing the core economic and financial problems. That being the case, new programs, more spending stimulus and money creation will always be the order of the day. Hence the currency will devalue and investors will find gold as their best safe-haven refuge.
The dollar will devalue because massive dilution caused by incessant money creation allows future obligations to become more manageable - for government - because it is the only way that it can meet its future obligations for employee pensions, accumulated debt, Medicare and social security.
A nominal dollar which buys much less in the future than it does today is still a dollar. Unfortunately the holders or recipients of those devalued pieces of paper will find they are essentially fraudulent promises.
These realities make gold the closest thing to a sure-bet investment. They are also the reasons why gold will go much higher than most of us allow ourselves to contemplate.
Buckle your seatbelts and enjoy the ride ahead!
Arnold Bock is a Guest Contributor to the two sites mentioned below:
- www.PreciousMetalsWarrants.com provides a free one-of-a-kind database (updated weekly) on all commodity-related warrants trading on exchanges in the United States and Canada. PMW also offers a modestly priced subscription service that ranks all warrants according to our proprietary leverage/time calculations at four projected stock price appreciation levels. You can also sign up for a free weekly email highlighting events in the precious metals marketplace and in the wonderful world of warrants in particular.
- www.InsidersInsights.com, another modestly priced subscription service, alerts subscribers as to when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling.