Gold Bullion Prices Could Soar Over $5,000 Per Ounce
Although precious metals haven’t been the most lucrative investments in recent years, several trends indicate a coming surge for gold prices. The yellow metal has fallen a long way from its previous highs in 2011, losing more than 40% of its value.
One of the most surprising discrepancies concerns the price of physical gold. According to a large broker of gold bullion, the premium for physical gold is five percent over the paper spot price. That means the pessimism we see in the market is artificial.
Another trend is what I call the “Cycle of Fear.”
You’ll notice that every so often the financial media will work itself into a frenzy over a calamitous fall in the Dow Jones Industrial Average. They’ll behave like the end of days is upon us, but lo and behold, they’re amnesic once the markets stabilize.
Each time the market spins out of control, we hear a different reason. China’s stock market crashed, Greece is in trouble (yet again), or earnings missed estimates; there’s always a new scapegoat for the panic.
Wall Street and the financial media are collectively bankrupt when it comes to self-awareness. They just don’t see their own patterns, so let me lay it out for them.
The stock market is built on a house of “easy money” from the Federal Reserve. Every time Wall Street gets close to remembering that fact, we begin to see excessive volatility in the market. Quantitative easing is the only tonic they recognize.
Like children, they throw a tantrum until the Federal Reserve comes to soothe them. By postponing the interest rate hike scheduled for September 2015, Janet Yellen was virtually tucking Wall Street bankers into bed at night.
She was keeping the monstrous reality at bay, but the Cycle of Fear can’t be ignored forever.
Gold Price Outlook Rises on Fear
Of course, gold prices inevitably crumble when money is printed and pumped into the stock market. Gold is a hedge against economic uncertainty, meaning its price movement is inversely related to the value of the stock market.
But what happens when the stock market growth is largely artificial? Does that imply that gold prices are artificially low? As conspiratorial as that sounds, the logic is sound.
The Cycle of Fear can illustrate my point far better than anything else. In the middle of 2013, the Federal Reserve was thinking about unwinding its bond-buying program.
Chart courtesy of www.StockCharts.com
Just by talking about buying a few less bonds per month, the Fed caused a spike in the Volatility Index (also known as the “Fear Index”). Predictably enough, we started to see gyrations in the market and the Federal Reserve backpedalled as quickly as possible.
The Fear Index dropped back down. But earlier this year, in September 2015, we saw the most egregious example of willful blindness in the market. Gold prices were starting to creep back up as we approached a rate hike from the Federal Reserve.
It was originally scheduled for June, but the Fed kicked the can to September on worries from China and Greece. Fair enough, but September was supposed to be the month.
The Cycle of Fear broke through its previous highs as investors grew absolutely terrified.
Chart courtesy of www.StockCharts.com
Notice anything strange? Perhaps an absurd spike during the run-up to September? Wall Street investors absolutely lost their minds at the prospect of no more monetary stimulus.
Gold Prices Will Likely Surge on Real Demand
What can we surmise from this Cycle of Fear? The most obvious answer is that Wall Street is drunk on low interest rates and easy money. We know that the threat of normalization in monetary policy scares them half to death.
The Federal Reserve has shown every inclination to indulge Wall Street’s addiction to quantitative easing, so how does the vicious cycle end?
My theory is simple: reality, in the form of on-the-ground economic data, will catch up with Wall Street. The Federal Reserve’s power grows less potent every day it postpones an interest rate hike.
When no one believes rates are going up in the near future, they feel no urgency to borrow or spend now. The power of monetary stimulus evaporates in those conditions.
The byproduct of a weakened stimulus program is slower economic growth, plain and simple. As the market absorbs that information, all hell will break loose. At that point, the only smart decision is to find a hard asset to hold onto.
Gold prices will shoot through the roof. When the stock market comes tumbling down, investors will quickly remember why they prized gold bullion as a safe haven asset.