First, it’s important to understand that the number itself is not that important. For companies that produce gold, $1,499 is much the same as $1,500. It’s the magnitude of the increase that matters; companies that were making $100 an ounce at $1,400 make twice as much at $1,500.
But what matters most for what happens next—and how to play it—is how we got to $1,500. There are two factors.
The first is the weakening outlook for the US dollar, which is generally bullish for commodities priced in USD. This is why we saw gold moving up as it became evident that the Fed was going to cut rates. The July 31 cut of 0.25% was just a starter, in my view. The Fed can say everything is fine and call it insurance, but I don’t believe it. Neither does the bond market, as shown by the inverted yield curve—which has predicted every US recession in the last 50 years. There are other danger signs flashing red as well, and the Fed has shown repeatedly since 2008 that it will throw the USD under the bus to try to keep the economic party going.
This is all very bullish for gold.
That’s great, but there’s more. One of the most notable trends of the decade is that major central banks around the world are moving toward or deeper into negative nominal interest rates. I think this will be seen as a game-changer by future economists; it destroys the longstanding complaint of mainstream investors that gold doesn’t pay interest. Gold may not do that in a strictly technical sense, but zero interest sure beats negative interest.
In our world today, gold is becoming a competitive form of savings, even for non-gold bugs.
That puts greed in the service of gold. I think greed is what drove gold above $1,400. And I think greed is likely to drive gold higher in the near- to mid-term.
It was fear, however, that took gold from $1,420 to $1,500 in little more than a week.
The trade war may seem like old news… not the sort of thing that could inspire fear in investors today. But the increased US tariffs on $300 billion worth of Chinese goods are a big deal. China’s response was immediate and drastic, cutting off agricultural purchases and letting the yuan fall against the dollar. Plus, I think most investors are at least a bit skeptical that the Fed’s cut was just insurance. They took this escalation in the conflict between the US and China as the serious development it is—and a surge in fear drove gold nearly vertically upward.
This makes it critical for investors to ask themselves: “Do I see more or less fear ahead in the US and global economies?”
If the answer is “less,” then it would be reasonable to expect gold to consolidate for a time, moving upward again when the Fed cuts rates again.
But I think the answer is “more.” I’m very keen to raise more cash to deploy on the next dip in precious metals and related equities.
Could I be all wrong about this? Could $1,500 gold be a trap that suckers gold bugs into overpriced stocks that will be losers for years?
Well, anything’s possible. I never claim to know the future.
But gold is nowhere near all-time highs, at least not in the USD terms quoted in internationally accepted spot prices. And there are plenty of stocks in great companies that are not overpriced.
I do think some correction and consolidation is likely after such a rapid move upward. But today’s precious metals market is nothing like the frothy peak near over $1,900 in 2011.
I’m not afraid of unrealized gains evaporating. I’m more concerned about some great stocks taking off before I can buy them.
I can’t let an arbitrary number like $1,500 make me lose my cool. Rationally, I know it’s a mistake to start chasing stocks. But gold is making so many headlines, a lot of the highly liquid capital that chases flavors of the day could come sloshing back into precious metals in the weeks ahead. Perhaps it “shouldn’t,” but $1,500 gold could by itself be the cause of $1,600 gold. And then $1,700… $1,800… perhaps all the way up to new nominal highs.
But nothing goes up in a straight line, so I’m sincerely hoping for a drop back toward $1,450 before the next big surge in price takes place.
Posted by :
Jack Dempsey, President
401 Gold Consultants LLC
jdemp2003@gmail.com