Looking at gold prices today, investors didn’t really seem to get the whole story last week. The U.S. Federal Reserve’s decision not to raise interest rates not only reflected lackluster economic growth, but also suggested a weak paper currency. When people finally realize what fiat money represents, gold investing would become a necessity. Based on that, my gold price forecast is quite bullish to say the least.
To see why there’s a bullish gold outlook when today’s gold prices look quite suppressed, let’s first take a look at the U.S. economy.
Soaring Debt Could Mean U.S. Dollar Collapse
The Fed understands that the U.S. economy simply cannot handle higher interest rates. You see, since the Great Recession hit the U.S. economy in 2008, the country has gotten too comfortable with low interest rates. And this raises the question of whether the growth we see today represents real growth in the economy or is just a result of these artificially low interest rates.
In the past several years, businesses financed their operations and expansions with cheap money. If rates were to resume to normality, it is uncertain whether these companies could afford that debt burden. Moreover, people who bought a home in recent years have enjoyed low interest mortgages. If rates were to rise, even by half of a percentage point, their mortgage payments would see a sizable increase.
Mind you, it’s not just businesses and homeowners that got too comfortable with low interest rates. The situation looks very similar for the U.S. government. From 2008 to 2014, U.S. government debt piled up, with interest payments increasing form $515 billion to $636.1 billion. If the interest rate doubles, the interest payment on government debt alone would top one trillion dollars! (Source: Federal Reserve Bank of St. Louis, last accessed September 23, 2015.)
The government debt problem is not a short-term one, as the long-term budget outlook is also quite gloomy. According to the Congressional Budget Office, the U.S. budget deficit would more than double as a share of economic output by 2040. At that point, federal debt would be equal to 107% of the U.S. gross domestic product (GDP). (Source: The Congressional Budget Office, last accessed September 23, 2015.)
High debt levels would no doubt put a lot of pressure on the federal government’s revenue, which would probably translate to higher taxes. This, in turn, would tame economic growth. Putting economic growth aside, what’s more worrying is the U.S. dollar.
$5,000 Gold? It’s Not as Crazy as You Might Think
What many people do not realize is that as a store of value, fiat money really isn’t in that great of a position. As renowned investor Peter Schiff said, it takes a lot of faith to hold the U.S. dollar. (Source: Daily Reckoning, last accessed September 23, 2015.)
“Up until 1971, the U.S. dollar was backed by the faith that the government would redeem its notes in gold,” Schiff wrote. “But, since then, that faith has been replaced by a simpler faith that others will always accept U.S. dollars in exchange for goods and services of real value.”
Since the U.S. dollar is not backed by the shiny metal anymore, holders of the currency are putting faith in the Fed, the U.S. government, and the economy. But with disappointing trade balance, ultra-low interest rates, huge government debt, and lackluster economic growth; it’s not certain how long that faith would last.
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If you take a look around the world, history would tell you that paper money is, well, money made of paper. “Most investors would certainly prefer gold to Argentine Pesos, Ghanaian Cedis, or Venezuelan Bolivars.”
I’m not saying that the U.S. dollar collapse will happen tomorrow or next week, but do know this: at the very bottom of nearly every monetary crisis is the fact that paper currency can be created out of thin air. It only takes the central banks to start printing before things begin to break loose.
The idea is simple: when more money is chasing the same basket of goods, each good in the basket is going to command a higher price.
Gold, on the other hand, cannot be created out of thin air. Compared to fiat money, the amount of gold available to us looks quite fixed even after including mining production. Moreover, gold was the choice when it comes to preserving wealth; it remained shiny even when governments were overthrown.
Here’s the Bottom Line
What’s next? Well, last month Peter Schiff said that the Fed would not hike rates and predicted more quantitative easing with QE4. The first statement turned out to be correct; maybe the second one will too. Right now, with the Fed backing off from the rate hike and having the option to further printing, those that haven’t realized it would finally start to see the problem with fiat currency. And when the faith in the U.S. dollar finally starts to fade, people will rush towards a better store of value—gold. When that happens, expect gold prices to shoot through the roof.