Gold prices could double amidst what is happening around the world.
The shiny metal has not been under hot pursuit lately, but will take central stage once again. Moreover, it might happen sooner than you think.
Let me explain.
Reason #1: Inflation
My first point comes from the huge inflation that is about to turn up at the doorsteps of the world economy.
Since the Great Recession, central banks around the world engaged in the most frantic money-printing frenzy the world has ever seen. Take the U.S. as an example; its money supply has increased by 67%, or more than $5.0 trillion since 2008. The situation is similar in Europe; the European Central Bank (ECB) started its quantitative easing program—printing money to buy assets—earlier this year. The program will be worth more than 1.1 trillion euros.
Such high levels of money printing have yet to show significant inflation consequences, at least according to official numbers. One reason is that the Consumer Price Index (CPI), the official measure of inflation, places significant weight on energy and housing. These two sectors are not moving forward that much; oil prices have plunged dramatically since last summer, and there is a limit as to how much rent can go up each year. Tamed by energy and housing, CPI numbers haven’t drawn much attention.
No matter what the numbers suggest, monetary inflation will translate into price inflation. The intuition is simple; when there is more money chasing the same basket of goods, each good in the basket is going to command a higher price. When the U.S. economy finally gets hit by a sizable inflation wave, expect your purchasing power and wealth to deteriorate. One thing investors have been using to preserve wealth for centuries is gold. The upcoming inflation could be one of the yellow metal’s shinier moments.
Reason #2: Stock Market Selloff
My second argument is that gold is a great hedge when uncertainty rises in asset markets—which is bound to happen.
Midway through the year, things are at a turning point. The first market to show a change of direction is the Chinese stock market. After gains of astronomical numbers over the past year’s rally, fundamentals started to set in. In 11 trading days, the Shanghai Composite Index plunged more than 20%. Even after the Chinese central bank lowered both interest rates and the reserve ratio, the selloff continued with the Shanghai Composite losing 3.3% on Monday June 29th.
The situation is bad in Europe, too. Since the ECB’s refusal to provide further loans to Greece, the country has been in fear of a bank run. Prime Minister Alexis Tsipras announced a shutdown of Greek banks and a daily limit of 60 euros on bank machines. The Greek banks are not expected to reopen until after a national referendum on July 5th.
According to Mohamed El-Erian, former CEO of Pacific Investment Management Co. (Pimco), there is an 85% chance of Greece leaving the eurozone. He also predicts that when the Grexit happens, there will be a significant amount of “de-risking” activity. That is, investors will move towards safer assets (such as gold) as opposed to risky ones (such as stocks). The potential selloffs in the stock market would send share prices plunging, and gold prices up.
It looks like what El-Erian said is already happening. On Monday June 29th, the Euro Stoxx 50, which tracks 50 of the largest and most liquid stocks in Europe, plunged 4.2%. The uncertainty wave has also sailed to North America. The Dow Jones Industrial Average slipped 1.4% in midday’s trading, while the S&P 500 Index also lost 1.4%. The NASDAQ Composite Index dropped 1.6%.
The selloff is already happening. Preserving wealth is of utmost importance in times of asset selloffs. The gold price chart below shows that in the darkest moments of the Great Recession, spot gold price solidly edged up. Look no further, gold is here.
(Chart Courtesy of Stockcharts.com)
Reason #3: The Smart Money is Buying
One argument that gold bears always use comes from billionaire investor Warren Buffett. Buffett thinks that gold has no utility and therefore no value. But this is not the case. Gold is an alternative to holding cash. In a time where monetary crisis is looming in the distance, gold seems to be not just an alternative, but a better alternative to holding cash.
Another billionaire investor, Ray Dalio, makes this clear: “I think [Warren Buffett] is making a big mistake. […] Money can be produced. Gold is somewhat limited. Gold is an alternative that should be a part of everyone’s portfolio but not in a big way. ”
To conclude, I am simply going to ask you to answer one question: After all that happened, do you believe that holding cash or stocks is safe? If your answer is no, you know that there is only one direction for gold prices to go—up.