Despite a few years of weak gold prices, China’s currency depreciation could be the tipping point that drives gold above $5,000. The yellow metal skyrocketed between 2001 and 2011, and another decade of similar growth is not unfeasible.
Let me explain.
A series of events in China have me convinced that gold prices are set to explode. The yellow metal has lost more than 40% since peaking near $1,900 in 2011. That’s a disastrous fall mostly attributable to “easy money” policies from the Federal Reserve.
Now China is mimicking the Fed’s maneuvers by firing up the printing press, adding fuel to this already-explosive scenario. But fear not; there is shelter to be found. To weather the coming crisis, investors should seek out safe haven assets like gold.
An “Easy Money” Bubble Means Gold Prices Could Rise to $5,000
There’s no doubt the Fed prevented a deeper recession, but they’ve been trying to engineer an economic recovery without the right tools. Monetary policy isn’t capable of manufacturing growth in the real economy. Try telling Wall Street that.
The S&P 500 and the NASDAQ both hit all-time highs in 2015, despite sluggish growth in the real economy. Growth in the monetary base perfectly corresponds to gains made by the Dow Jones Industrial Average because the Federal Reserve was dragging it higher.
After China’s stock market crashed in a spectacular fashion during June 2015, their central bank opened the Federal Reserve playbook. The government’s decision to withdraw margin trading cut 30% out of the Shanghai Composite Index, sparking fears that China’s miracle growth story was drawing to a close.
Ultimately, the government reversed the margin trading ban and continued building a bigger bubble, but with a crucial difference. The central bank was now committed to propping up the value of stocks through asset purchases.
Another Decade of 645% Growth Could Happen Soon
Printing money at that scale, and for those reasons, is simply a bad idea. It creates the illusion of a recovery whereby leverage is encouraged, assets appreciate without a corresponding rise in fundamentals, and investors get drunk off their own optimism.
A self-reinforcing trend doesn’t hurt in the short term, but it can devastate markets over the long term. When enough investors understand that all their gains were hollow, fear takes hold. At that point, it’s difficult to stop the outflow because no one wants to be the last one out. And as the saying goes; the bigger they are, the harder they fall.
Although we were told that China’s stock market crash was superficial, the issues actually run much deeper. The currency devaluation is proof enough of that. By depreciating their currency, Chinese officials hope to boost exports and encourage foreign direct investment, meaning they’re afraid of a slowdown.
Remember that between 2001 and 2011, gold rose an astonishing 645% from $255.00 to $1,900. Part of the reason was that the 9/11 attacks roiled capital markets in a way that drove investors to secure assets. Then the 2008 financial crash evoked the same response.
When the next crash happens, most of the survivors will probably own hard assets like gold and silver. And judging by the Chinese government’s recent actions, we may see a crash sooner than expected.
Gold Miners are Sorely Underpriced
Low gold prices have shattered the market capitalisations of many prominent mining companies. The result is a buying opportunity for ambitious investors, but it’s important to evaluate which firms are in the best position to survive.
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