For anyone who has been following the rise in the gold price recently, it’s an indication that everything we’ve said about gold is finally coming to fruition. Gold’s ability to protect investors against financial turmoil is the stuff of legend, and we always knew that the time would come again when ordinary investors would once again turn to gold to protect their assets. That time is now.
It seems like just yesterday that gold broke through the $1,800 barrier, and it was just two weeks ago that gold broke through $1,900 for the first time since 2011. Gold has continued to push even higher, now breaking through $2,000 an ounce for the first time ever. That’s nearly a 60% gain since last year’s low price of around $1,270. Where will gold stop, or will it?
Despite this bull run, there are still naysayers out there who think this is just a flash in the pan. But here are four reasons the gold price will continue to rise.
1. Deteriorating Economy
With a 33% drop in second quarter GDP and over 50 million Americans having lost their jobs at some point, this year has been a rough one for the US economy. Many analysts expect millions of those job losses to remain permanent, as tens of thousands of restaurants and other small businesses will likely go out of business.
We have yet to see the full effect of the economic downturn, the wave of bankruptcies that is on its way, and what will happen as both households and retail stores are unable to pay rent and face eviction. Even homeowners aren’t immune, as half of all homeowners are thinking about trying to sell their homes due to financial difficulty.
Now that the federal unemployment insurance boost has worn off and people have long since run through their Trumpbux, they’re having to come to terms with the fact that the economy is in the dumps and won’t be improving anytime soon. Unemployment is still high, businesses aren’t anywhere close to full operation, and states are still grumbling about another possible round of lockdowns.
The writing is on the wall, and it’s only a matter of time before stock markets crash, just like they did in 2008. Investors remember gold’s performance during the crisis, as it nearly tripled in price. And that’s why so many are rushing to invest in gold, as they’re certain that it will match that performance once again.
2. Supply Issues
There are two components to the gold supply when it comes to investing in gold: mining supply and coin supply.
Mining supply is largely fixed. That’s one of the major positives of gold as an investment, the fact that the supply doesn’t increase by a huge amount each year. Gold mines are heavily capital intensive, whether they’re open pit mines or underground mines.
A high-grade mine might contain 5-10 grams of gold per tonne of rock, meaning that three to six tonnes of rock (6,600 to 13,200 pounds) will have to be mined in order to produce a single ounce of gold. Lower-grade mines may only have 1-2 grams of gold per tonne, vastly increasing the amount of rock that has to be processed.
The process of mining rock, crushing it, extracting gold, and returning the mined remnants takes time, energy, and capital. Finding new deposits and bringing them online isn’t a turnkey operation, as mine exploration also takes time. Even if gold were to shoot to $100,000 an ounce, that wouldn’t speed up the ability of mining companies to produce raw gold.
Coin supply is also tight right now. Most coins that have been produced until today are already in private hands, whether collectors or investors. And new production is dependent on stockpiles of gold held at mints, the ability of mints to source new gold, and the ability of mints to produce gold.
With COVID-19 wreaking havoc on workforces at some mints, the supply of gold coins to the investor market could be severely curtailed for at least the next year or two. The US Mint, for instance, will likely have to produce either gold or silver investment coins, not both, as it seeks to keep COVID from spreading among its workforce.
Supplies of coins on the market were already tight due to unprecedented investor demand, but they’ll get even tighter now that mints are having to limit their operations. And that should help boost the gold price for the foreseeable future.
3. Ultra-Loose Monetary Policy
The Federal Reserve’s monetary policy this year has been unprecedented in both its size and its scope. The Fed promised up to $5.5 trillion to shore up overnight funding markets, boosted the size of its balance sheet by over $3 trillion, and has monetized much of the federal government’s new stimulus spending.
So far the federal government is set to run a deficit this fiscal year of almost $4 trillion, and that could grow before the end of the fiscal year in September. Since much, if not all, of that may end up getting monetized by the Fed, that would mean a significant weakening of the dollar. Putting it quite plainly, we’re approaching the point at which policymakers in Washington no longer care about inflation or even hyperinflation, they just want to run the printing presses nonstop in order to keep liquidity flowing through the economy.
Some investors are undoubtedly taking advantage of this new liquidity to invest in gold, getting ahead of inevitable inflation. But one thing is nearly certain; the more money the Fed creates out of thin air, the higher the gold price will get, as investors flock to safety.
4. Uncertainty About the Future
“Regime uncertainty” is a term used to describe the fears investors have about the future and their ability to predict how government actions will impact their investments. And right now in the US, we’re suffering a great deal of regime uncertainty.
It’s difficult to characterize the US as a country driven by the rule of law, as laws and regulations can change quite abruptly depending on which political party is in power. What is perfectly legal when Republicans are in control could suddenly be prosecuted under Democrats, and vice versa.
The prospects of a Joe Biden win in November are unnerving for many investors, not least because it could mean a rollback of Trump’s tax cuts and an explosion in government spending, particularly if Democrats also gain control of the Senate. We’ve seen with the latest stimulus proposals how Republicans want to spend a “mere” $1 trillion, while Democrats want to pile another $3 trillion on top of the deficit that’s already at nearly $4 trillion.
Those sums far exceed the amount of money the government takes in through taxation, so how will those bills be paid? Will taxation jump through the roof? Will the Fed monetize trillions more in new debt issuance? Will the dollar’s purchasing power slide into oblivion as all this new money is created?
No one would have thought that governments around the world would actually lock down their economies, as the predictions of economic malaise were well known. Yet they did lock down, perfectly content to destroy their economies to combat COVID. So what will they do next? It’s impossible to predict, and many investors are panicked about what might happen next. And that’s why they’re moving to gold.
How High Will Gold Go?
Even though 2020 was shaping up to be a great year for gold, most Wall Street analysts didn’t expect it to rise any higher than $1,650 an ounce. Even as gold broke through the $1,800 barrier, $2,000 was still seen as a level to be reached next year. And now gold has broken through that barrier, and higher. Are $2,500 and $3,000 soon to be reached?
At this point it’s anyone’s guess when those levels will be reached. While it seems unlikely that gold will reach that high in 2020, it very well might. But if the economy continues to weaken over the coming year, gold at $3,000 seems like a not unlikely milestone to be reached in the next few years. That would be great news for all the investors who have trusted in gold to protect their investment assets.