As it stands, there are more reasons for gold prices to go higher than there are for the yellow metal to decline.
The mainstream is focused on just two factors; they argue there isn’t any inflation and that the U.S. economy is performing well enough. Remember: there’s more to gold prices than just these two phenomena.
Think of gold as a global currency; it’s not just limited to the U.S. That said, there are many problems brewing across the global economy. Mark my words: in just a few years, today’s gold prices will look like a bargain.
Greece Defaults, Uncertainty Increases
One of the main stories I’ve been following over the past few months is the state of the economy in Greece. We’ve been bombarded with news from the eurozone regarding the debt-infested nation. One day we are told the country will exit the common-currency region. Then, we are told the European Central Bank (ECB) won’t let it happen and that Greece will receive another bailout.
Now, through reports, we’re hearing that the Greek government is actually planning a default on its debt. One of the government officials was quoted in saying, “We have come to the end of the road. [. . .] If the Europeans won’t release bailout cash, there is no alternative [to a default].” (Source: Financial Times, April 13, 2015.)
If Greece does default again, I won’t be surprised if the prospect of Greece exiting the eurozone returns. I also won’t be shocked if, this time around, the country simply chooses to leave, or if the threats from Greece’s government escalate further than they already have.
All of this is only going to create uncertainty about the region and the euro. Understand this: if Greece gets the “default and exit” card, what’s stopping Spain, Italy, and Portugal from starting from scratch again? This will be bad news for investors in the eurozone; they will seek safety—which is precisely what gold will provide.
China’s Economic Slump
Trouble in the eurozone is one thing. Trouble in the Chinese economy—the second-largest economy in the world—is quite another. This economy is struggling and has many problems that no one seems to be concerned with. One of the biggest threats to the Chinese economy that I’m watching is the amount of debt.
According to McKinsey Global Institute, between 2007 and mid-2014, debt in the Chinese economy quadrupled—going from $7.0 trillion to $28.0 trillion. This amount represents 282% of the Chinese gross domestic product (GDP). Half of all this debt is linked to the housing market. And half of all new lending is linked to shadow banking, which is the provision of financial services from unregulated non-bank institutions. (Source: McKinsey & Company web site, last accessed April 13, 2015.)
The problem is that the housing market in the Chinese economy is facing scrutiny. According to the National Bureau of Statistics of China, newly constructed home prices in 66 of the 70 cities it follows declined in February. The prices for already built and second-hand homes declined in 61 of the 70 major cities. (Source: National Bureau of Statistics of China web site, last accessed April 13, 2015.)
If the housing market declines, what will happen to loans tied up in it? It would be foolish to think nothing will happen. Bad debt numbers in China will increase. This, in turn, can result in bank defaults. If this comes into play, expect uncertainty to skyrocket. Also know this: gold is a great hedge during banking crises.
Why Do I Remain Optimistic Toward Gold?
It is appalling to see how investors are stuck on the inflation and U.S. economic growth figures—completely ignoring what’s happening in the global economy.
Gold provides a hedge against uncertainty and the devaluation of currencies. In the global economy, we have an abundance of these factors, and more is expected going forward. I believe investors who are assessing the precious metal and gold mining companies now will reap the rewards sooner than many anticipate.