Howard Marks, Oaktree founder told Bloomberg TV, right now is not the best time to invest in stocks. Soon after that, the co-CIO of Bridgewater, Greg Jensen, said that his fund was cautious on stocks, and described them as “frothy.” His assumption on gold, however, was that the yellow metal value would rise to $2000 or even higher.
In the past ten years, the gold price on a US dollar basis rose by 450%. With such a rise, the traditional exchange trader tends to use the word “bubble.” But you should be aware that most people see bubbles better when they are not invested in the asset that is on a rally.
According to a study in the United States, private and institutional investors only invest 0.15% of their assets in gold and gold mining stocks.
How expensive can gold become?
$ 2,300 is the inflation-adjusted all-time high of 1980. We are pretty sure gold will hit that mark. Everything else depends, of course, on how monetary easing rounds take place around the world. With 80 percent of the price gains often occurring during the last run of a bull market, gold could even rise to more than $ 8,000 a troy ounce. This is an assessment based on the Pareto principle. This 80/20 principle can be applied to many areas.
As long as real interest rates are not positive, i.e., three to four percent, the bull market will continue. Only after a trend acceleration, gold starts to become a dangerous ride. We are still a long way from that.
Why is the price of gold rising so relentlessly?
It may not even be just this “fear factor” or the fear of financial Armageddon. The bull market is currently on a healthier foundation than it was in the 1970s and 1980s. China and India are responsible for 50 percent of physical demand. One should not underestimate the “love factor” from Asia.
The activities of the central banks do the rest: India, Russia, Turkey, Mexico and probably also China (hidden) have recently increased their holdings. Gold has always migrated from regions where prosperity is stagnating, and it flows where the economy is prospering and where savings are increasing.
Since 2002, when the euro was introduced as cash, the combined base money supply of the American and European central banks has risen from $ 1,564 billion to $ 6,578 billion. That is 420 percent. This is why the precious metal shines so strongly.
The combined base money supply of the four most important central banks has grown by 15.2 percent per year since 2000. That means – in the sense of the Austrian School of National Economy – inflation. Inflation is just a logical consequence of this. The central point of “understanding” gold is the relative scarcity in comparison to fiat currencies that can be expanded at will with zero work.
The gold inventory grows at around 1.5 percent per year. The monetary aggregates, on the other hand, grow many times over. This should be a basic consideration when analyzing the natural watering down of a currency.
Does gold protect you from everything and always?
No, the most negative environment for holding gold is deflation, which means falling inflation rates. What usually happens during a severe deflationary period is that State budgets get overused, the financial sector faces systemic problems, and currencies are devalued to reinflate the system.
Credit quality is gradually deteriorating and the creditworthiness of companies and states is being questioned. There is a rethinking of capital growth towards capital preservation. Trust in paper fiat currencies start falling, while gold begins gaining in importance and cryptocurrencies are also starting to play a tiny roll. Cryptocurrencies like bitcoin still need to gain trust when being used as a preservation of wealth as the massive drop from the 2017 high doesn’t bode well for a conservative store of value title just yet.
A gold standard sounds similarly illusory nowadays. We assume that a return to a gold standard is not a major economic or organizational problem. Rather, it is a highly political and philosophical fundamental question that has to be answered. I believe that the level of economic suffering would have to increase significantly before concrete economic measures would be demanded by the people let alone implemented by a government. The smart money is protecting their own wealth by buying solid, insurable bullion bars that simply sit in a vault, storing value until stock markets come back down to earth. This is when smart investors would be ready to pounce and have plenty of liquidity to buy the dip in the wider global market economy.