The Gold No-Brainer

The Gold-Buying Impulse Just Got Triggered … Again

By Eric Fry

Investors rarely buy gold because they want to.

They buy it because they have to.

We have entered one of those rare episodes. Gold has become such a compelling trade in the current environment that it is difficult to walk away from it.

We have to buy it.

Obviously, no investor must buy anything. All trades and investments are optional, including this one. Gold, in particular, is an optional trade because its success or failure relies on a quirky combination of monetary trends and mob psychology.

The metal doesn’t produce products or earnings. It will never design a new iPhone app or a revolutionary biotech drug. It just sits there like a diva, basking in adoration from its fans.

That said, gold occasionally offers great, if not spectacular, trading opportunities.

I will go out on a limb — way out — to predict that the gold market is currently offering one such opportunity … and not just for one reason.

But for many reasons …

Four Catalysts Hit Gold at Once

Historically, one or more of the following factors tends to trigger a major a gold rally:

• Financial market cyclicality — that is, “just because.”

• Economic crisis.

• Geopolitical stress.

• Monetary instability.

Any one of these four factors possesses the power to drive gold prices here. But today, we don’t have to choose — all four are combining to trigger the gold-buying impulse.

I won’t bother detailing the first three of these influences because I think they are self-evident.

But that last item, monetary instability, may require some explanation — both because it is less obvious and because it may be the most important influence of them all on the next leg of the gold bull market.

On the surface, the global monetary condition seems fairly stable and crisis-free. No major currencies are plummeting against the U.S. dollar. And the dollar itself, while bouncing around a bit lately, is trading close to where it has been for most of the last five years.

So, where’s the instability?

Below the surface. Although all major currencies are maintaining their values relative to one another, they are all losing value relative to gold.

During the last 12 months, the gold price has soared 33% against the U.S. dollar. But the ancient monetary metal has produced even larger gains against the euro, British pound, Canadian dollar, and Chinese renminbi.

In fact, the gold price is now trading at new all-time highs against every major currency except the U.S. dollar.

That’s the subsurface monetary instability that is attracting very little attention. But now that the COVID-19 health crisis has morphed into a global economic crisis, the world’s governments and central banks are pledging virtually unlimited “resources” to combat a recessionary fallout.

As such, the gold market may be on the threshold of entering a 2009-style bull market.

Let’s take a brief look back …

In February 2009, during the darkest moments of the crisis, the gold price hit a new record high above $1,000 an ounce. But three months later, the stock market had bounced more than 30% from its bear-market lows and the crisis appeared to be ending.

At that point, the “crisis rationale” for owning gold was fading away. So with gold still trading around $900 an ounce, that moment probably seemed like an ideal time to cash in on crisis-era gold trades and walk away.

But the gold market was just getting warmed up … thanks to monetary factors.

In late 2008, Federal Reserve Chairman Ben Bernanke introduced a controversial new term to the world, “quantitative easing” (QE).

In essence, the Fed would conjure dollars from thin air and then use those dollars to buy U.S. Treasurys and mortgage-back securities in the open market — both to support their prices and to provide liquidity to the credit markets.

Economists still debate the merits of this unconventional tactic, but in the public narrative, “It worked.”

The economy recovered and the stock market would advance to a record-setting 11-year bull market.

Turning back to the gold market, Bernanke’s QE program was simply a new twist on an old tactic called “money printing.” As such, this program undermined the dollar’s value to some extent and boosted the value — and appeal — of gold.

Even though the gold price was trading near a record high in early 2009, it would double over the next two years.

Some version of this history may be about to repeat itself …

When QE Goes Up, So Does Gold

The Federal Reserve, along with other major central banks around the world, are now implementing very large and aggressive QE programs. And most major governments are also throwing trillions of dollar of debt-financed rescue packages and stimulus measures at the global economy.

At the margin, these titanic monetary and fiscal efforts should boost the relative value of gold over the next year or two.

For perspective, Ben Bernanke’s QE spent $2 trillion over a span of three years. Jerome Powell’s new QE program just spent $2.6 trillion over the last two months! In other words, the current QE episode is like the 2009-era version on steroids.

The European Central Bank, Bank of Japan, and several other major and minor central banks are conducting large-scale QE operations as well — all of which bodes well for the gold price.

And let’s not forget that the other three factors that tend to move the gold price higher haven’t gone away.

Stock market volatility, economic crisis, and geopolitical stress are all registering at least “9” on a 10-point severity scale.

Bottom line: I don’t really want to recommend gold, but I have to. I have never seen a more promising setup for a gold trade in my 30-year career.

Learn more about my most recent suggested gold trades here.

Regards,

Eric Fry