As a traditional safe haven asset, gold has always been that reliable fall-back “currency” that investors run to when the economy or monetary system goes awry. After all, gold is still considered money, and money is meant to be sound, not speculative.
But there are certain conditions under which gold prices can rise with a trajectory that leaves other speculative assets in the dust. Exploiting these golden nuggets of opportunity and reaping their financial rewards is a matter of panning through the economic noise that distorts the signal indicating that a rush may be on the horizon
Well, here are 10 fundamental scenarios that might support gold this year.
One – Domestic Political Uncertainties May Drive Gold Up Either Way
The 2020 presidential election is just around the corner. Americans will have to make a choice: free-markets or bigger government. During the Obama years gold rose 125%, reaching $1,800. If the Democrats win, we may see a repeat. But if President Trump wins, strangely, gold may still rise. Here’s a longshot: one of his economic advisors, Judy Shelton, is pursuing a reintroduction of the gold standard, perhaps through issuing gold-backed Treasuries. So, whichever way the wind blows may still be a tailwind for the yellow metal.
Two – The Cost of Living is Increasing
The costs of goods and services are getting expensive. This may mean that purchasing power is more or less eroding. So what if the Fed’s inflation measure doesn’t take into account the rise in food and energy costs? Food and energy costs are rising. And if we haven’t reached 2% inflation by Fed measures, how much higher might prices go when it does? If there is anything that has reliably triggered a flight to gold and a rise in gold prices, inflation and purchasing power erosion are definitely it.
Three – Stock Market Valuations May Indicate the End of a Cycle
Not only have debt-fueled corporate buybacks been powering the euphoria that prompted the investing public to jump into the bull market late, not only have decent corporate earnings been distracting investors from the more grave fact that our national debt is rising beyond government’s capacity to pay it back, the fact remains that markets and economies are cyclical. We had a great run, a great party. The fundamentals just left the door. Euphoria decided to stay, not noticing that the host of reason and rationality had just put an end to the event. It’s just a matter of time before exuberance fades. And when it does, it’s often too late.
Four – Central Banks Across the Globe Are Buying Gold at Record Levels
Unlike most investors, central banks are counted on to remain fiscally responsible, forward-looking, calculated, and sober. Central banks have begun slowly accumulating gold reserves to hedge against heightened geopolitical uncertainty and, of course, the US dollar. In 2018, central banks purchased as much as 651 tons. This was the highest purchase on record since Nixon put an end to the gold standard back in 1971. In contrast, a large segment of the investing public see gold as a relic. But the majority of the world’s most powerful central banks beg to differ. So when it comes to the debate as to whether gold is money with intrinsic value or a mere relic, who would you rather trust–your fellow investors, or the world’s largest bankers?
Five – Large Investors and Institutions Are Buying Gold Ahead of the Crowd
The world’s most successful investors lead the crowd rather than follow it. There is no safety in numbers, not if you’re trying to achieve wealth in investing. This doesn’t necessarily require a contrarian outlook, it just requires one to invest according to fundamentals, not fads. And the fundamentals regarding the decrease in gold production amidst global economic uncertainty may be positive for gold. Astute investors may already know this. The average investor may also knows this, but he or she generally waits for price to move as everyone else jumps in. There’s the boat, and there’s missing it.
Six – Recession Fears
The current 10-year economic expansion may be on borrowed time. History has shown that every decade has been marked by at least one slowdown or recession. It’s a cycle, and strangely, people react to the possibility of a recession as if it were the plague. It isn’t, and when it’s done, the market will likely expand again. Among the last four recessions here in the US, three of them were kicked-off by unexpected shocks, or foreseeable shocks that the investing public just chose to ignore or deny. There’s a likelihood that such a kick-off will happen again. And gold has proven to be one of the best recession-proofing assets during times of recession and downturn.
Seven – The Fed Has No Ammo to Save the Economy in the Next Recession
You probably noticed that the Federal Reserve made a desperate attempt to normalize rates in 2018. You also probably noticed the effect it had on markets. The current Fed under Powell has taken a different approach toward reaching a neutral rate, a more accommodative or responsive stance. They understood that unless they can unload their balance sheet, they’d have no room to lower rates should another recession befall the economy. Well, that approach has changed. Perhaps the Fed became sensitive to market response. Or perhaps their inflation gauge, however flawed it may be, gave them reason for pause. Whatever the case may be, the Fed’s balance is still bulging, the cost of living is still rising, and when the next recession strikes, the Fed will have close to nothing to combat the very recession they played a strong hand in creating. With purchasing power declining and the threat of a major collapse in asset values, gold is one of the few safe haven assets that can weather the storm.
Eight – Global Tensions Are Growing
According to the World Economic Forum Global Risks Report, the current geopolitical environment is far more perilous now than it has been in decades. Nearly 90% of the experts identified economic confrontation and rising tension as the most urgent risks in 2019. Ian Bremmer of Eurasia Group stated the current state of geopolitical risk “hasn’t been in evidence since World War II.” Despite potential disputes between nations and the havoc it can wreak among economies and currencies, gold would still be accepted as money across virtually all nations involved, because it’s recognized as the safest and soundest monetary asset available. Hence, the large-scale central bank purchases.
Nine – The US Dollar May Be Weakening
The US dollar is the world’s reserve currency, its current status undisputed, its future prospects indisputably uncertain. The dollar is up against several factors that weigh heavily against it–several nations are beginning to de-dollarize, recessionary fears are increasing, US economic and manufacturing data is weak, and the Fed will likely not raise interest rates to the degree that it did last year. In short, the dollar is skating on thin ice. Toward the end of 2018, we saw gold prices rise despite dollar strength. With the dollar growing weaker, gold may continue to appreciate.
Ten – Gold is a Time-Tested Safe Haven
As J.P. Morgan once said, “Gold is money. Everything else is credit.” Central banks across the globe seem to attest to this belief. The US Federal Reserve might not. But again, they hold the largest gold reserves in the world.
The risk of loss in the trading of stocks, options, futures, forex, foreign equities, and bonds can be substantial and is not suitable for all investors. Trading on margin or the use of leverage is not suitable for all investors and losses exceeding your initial deposit is possible. Supporting documentation is available upon request. Trading futures, options on futures, and FX involves substantial risk of loss and is not suitable for all investors. Carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources and only risk capital should be used. Opinions, market data, and recommendations are subject to change at any time. The lower the margin used the higher the leverage and therefore increases your risk. Past performance is not necessarily indicative of future results.