Is it time to throw in the towel? Is the bull market in precious metals really over? [I don’t think so because my analyses suggest]…that nearly all of the fundamental factors that have been driving the gold price higher in the past decade have only strengthened in the past two years. Now that the correction has most likely run its course, I expect gold to…bounce sharply higher. Here are 10 reasons why.
The above are edited excerpts by Jason Hamlin (goldstockbull.com) in edited excerpts from his original article* entitled 12 Reasons Why Gold Will Rebound and Make New Highs in 2014.
[The following article is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Hamlin goes on to say in further edited excerpts:
#1 – Rapidly Growing Debt
Just one day after President Barack Obama signed into law a bipartisan deal to end the government shutdown and avoid default, the U.S. debt surged a record $328 billion, the first day the government was able to borrow money. The U.S. national debt has increased by more than a trillion dollars in the past 12 months. This pushed the total debt above $17 trillion for the first time in history. As the debt increases and GDP growth slows, the debt-to-GDP ratio will continue to rise at an accelerating pace. This is simple math and it dictates an ongoing slide in the purchasing power of the dollar and rise in the purchasing power of real assets and particularly monetary metals such as gold and silver.
The following charts show the steepening rise in total public debt and the debt-to-GDP ratio of the United States. Many economists view a debt-to-GDP ratio of 100% as the point of no return. It is a slippery slope that is certain to push higher at an accelerated rate in the coming years.
Note that alternate calculations of the total debt including unfunded liabilities and off-balance sheet items, puts the number somewhere closer to $100 trillion or more than 5 times the official figure. This equates to a debt-to-GDP ratio of over 500%, not the 100% charted below.
Takeaway: The total level of debt and the debt-to-GDP ratio have both increased substantially in the past two years. This is bullish for gold, as precious metals have a positive correlation to total debt levels.
#2 – Inept Government and Partisan Bickering
The fight over the budget and debt ceiling shut down the government for 16 days and ended up costing billions more than if the government would have remained open…It tarnished the image of U.S. financial strength and has many people worldwide questioning how the United States will continue to pay its bills. These shenanigans also led Fitch to put the U.S. on “rating watch negative” and the Chinese ratings firm, Dagong, formally downgraded its rating of the U.S. from A to A-.
Both sides of the political aisle continue to engage in deficit spending and neither side seems serious about addressing the debt and deficit. Sadly, my guess is that they will never voluntarily reduce spending and will have to be forced to do so via default or other events. The more they shine a light on the fiscal weakness of the U.S., the faster other nations dump U.S. debt and the sooner we will see the inevitable ratings downgrade and debt default (official or via hyperinflation).
Takeaway: The Western political system is broken and the idiots running the U.S. government severely damaged government credibility and brought the country dangerously close to a technical default. They haven’t made any serious effort to balance the budget and their “solution” only kicks the can down the road for a few more months. Look for more of the same in the near future, which will further erode the creditworthiness of the U.S. government and faith in the U.S. dollar. This increases the bullish outlook for gold.
#3 – Dollar Losing Status as World Reserve Currency
The exorbitant privilege of being able to print the world reserve currency is coming to end.
- “It is perhaps a good time for the befuddled world to start considering building a de-Americanized world,” said a statement by Xinhua, the state news agency of China — which holds some $1.3 trillion in Treasury bonds.
- “The United States will inevitably lose its reserve currency monopoly,” wrote economists Hélène Rey of the London Business School.
- Pierre-Olivier Gourinchas of the University of California, Berkeley, and Emmanuel Farhi of Harvard University said. “It can only be a matter of time before the world becomes multipolar.”
- The IMF echoed this sentiment, stating how “reserves concentration in the government debt of one country introduces idiosyncratic risks to the international monetary system.
- Gold Standard Should Replace “Exorbitant Privilege” of USD Reserve Currency Status – Here’s Why
- Shift From U.S. Dollar As World Reserve Currency Underway – What Will This Mean for America?
Several nations now have bi-lateral trade agreements that bypass the dollar.
- China has made arrangements to swap Yuan’s for for local currencies with Japan, Russia, Australia, Iceland, South Korea, Malaysia, Brazil, India and South Africa. The BRICS nations are emerging as a powerful economic force and they are intent on conducting affairs without use of the U.S. dollar.
- The growing rift with Saudi Arabia threatens the petrodollar.
- Oil-rich countries that have attempted to sell their oil in currencies other than dollars include Iraq and Libya, both bombed into submission.
- Iran is now trading oil for gold, bypassing the U.S. petrodollar. This is likely the real reason they are now in the crosshairs of the U.S. military.
- Syria is seen as a stepping stone to attacking Iran, but widespread opposition from ally countries and citizens alike stopped the recent war momentum.
As the influence of the petrol-dollar continue to wane, so too will the power of the U.S. dollar as the world reserve currency. Without the ability to deficit spend and export our inflation, it will come home to roost and the dollar will suffer or even collapse as have other debt-ridden fiat currencies throughout history.
Takeaway: The dollar historically has an inverse relationship to gold. As the dollar continues to lose its role as world reserve currency and its purchasing power declines, the gold price will move higher. Mike Maloney and other analysts have calculated that the gold price needs to climb past $15,000 per ounce to account for all of the paper dollars that exist today. As more and more money is printed and debt is monetized, this target price [for gold] only increases.
#4 – Global Race to Debase
It is not only the U.S. central bank that is printing money with reckless abandon. Around the globe, central banks are trying to remain competitive in foreign trade by debasing their currency in line with the dollar. No countries are willing to admit it, but the currency war is on. As the competition heats up, they will no doubt overstep in their push to print money. This will translate into higher gold prices worldwide, measured across multiple currencies.
Takeaway: The race to debase has only intensified in the past few years, as evidenced by new stimulus programs in Europe and Abenomics in Japan. Put simply, the more fiat money that is created in this currency war, the higher the price of gold and other commodities will climb.
- Is the First of Many Currency Crises Just Now Unfolding? Are Gold & Silver About to Take Off As a Result?
- Which Country Will Win the Race to Debase Its Currency the Most?
- The Currency War: Which Country Will End Up With the Fastest Currency in the Race to the Bottom?
#5 – Inflation Will Pick Up as Velocity of Money Accelerates
Up until this point, a large portion of the new money printed since the financial crisis has been parked with the banks or as excess reserves with the FED. Banks are reluctant to lend and corporations are also hoarding cash. Individuals are consuming less, tightening their budgets amidst high unemployment and stagnant wages and paying down debt. This means that money has not been circulating throughout the economy at a very fast pace. The stimulus has disproportionately benefited banks and the wealthiest people in society, doing little for the middle class that continues to get squeezed.
- These 21 Countries Have Experienced Hyperinflation In Last 25 Years
- Rapidly Rising Interest Rates Could Lead to Financial Collapse – Here’s Why
To get money flowing, future stimulus efforts must be focused on tax breaks or refunds for the working class, who are more likely to spend that money into the economy than the rich that aren’t living near the margin. With unemployment higher than desired and official inflation lower than desired, I think we will see Yellen and the FED focus more on consumer stimulus now that the banks finances have been shored up. This will lead to a sharp increase in the velocity of money and when multiplied by all of the money created in the last few years, it could lead to high inflation or even hyperinflation if the FED fails to soak up the excess liquidity in time.
Takeaway: An increase in the inflation rate, driven by an increase in the velocity of money, will be very bullish for gold.
#6 – Diversification of Price Discovery and Decreased Power to Manipulate Commodity Markets
With the rising power and influence of the East, we are seeing the centers of global finance reposition. These include the Shanghai Exchange and Pan Asian Exchange, where an increasing amount of physical gold and silver are being traded. If you believe the COMEX and London Bullion Market Association (LBMA) are helping to manipulate the prices of precious metals, it will be welcomed news to see new exchanges emerge that can provide alternative price discovery.
Takeaway: The diversification of price discovery in the gold market will lessen the ability of Western powers to manipulate prices…[and] any diminishing of this manipulative ability will be very bullish for gold.
#7 – Increasing Physical Demand Worldwide, Including Central Bank Demand
- Consumer demand for gold is up…
- Total bar and coin demand has set a new record…
- U.S. silver eagles sales are on pace for a record year…
- Central banks continue buying at a frenzied pace…
Furthermore, there is a growing movement of gold repatriation around the globe. First Venezuela, now Germany, the Netherlands, Switzerland, Poland, Romania, Finland, Ecuador and others are demanding their gold back from the FED and Western financial institutions.
Takeaway: Increasing demand, particularly by those taking physical delivery, will also serve to lessen the impact of manipulation in the markets. Investors are increasingly losing faith in paper gold and as the real metal is removed from the market, the lower supply will put upward pressure on prices and force exchanges to settle in cash.
#8 – Stagnant or Declining Supply
- Total gold supply is contracting…
- There have been huge outflows from COMEX and Shanghai stocks.
- With prices at or near the cost of production, several mining operations have been suspended or shuttered, which will further restrict supply.
- Mints in the U.S. and Canada have resorted to rationing supplies of their popular bullion coins, a further signs of tightening supplies.
Takeaway: Economics 101 dictates that increasing demand and declining supply [of gold will] lead to higher prices.
#9 – Tiny Size of Gold Market versus Stock or Bond Market Will Provide Leverage
It has been estimated that all of the gold ever refined would form a single cube 20 m (66 ft) on a side. This cube would contain around 5.5 billion ounces of gold and be worth roughly $7 trillion. By comparison, the world stock market is estimated at $50 trillion and the bond market at around $100 trillion…[As such,] it would only take a small percentage of money moving from these larger markets into the gold market to overwhelm available supply and send prices substantially higher.
Takeaway: Participation in the gold market is at very low levels, estimated at around 1% to 2%. Even a small rise to 4% or 5% participation, would cause demand to spike and send prices significantly higher. Sentiment is extremely bearish at the current time and can only become more bullish from here.
#10 – Prices Have Dropped to the All-In Cost of Production, Which Typically Provides Support
It is not often that a commodity will drop to a price below the cost of production. Can you think of many things that you can buy for less than it costs to produce it? At current price levels, many miners are being forced to suspend operations as their all-in sustaining cost to produce an ounce of gold makes the operation unprofitable. Even some of the best miners are just barely squeezing out quarterly earnings, propelled by increasing production and cost controls. Supply levels have already been impacted, but any further drop in the price of gold and silver will lead to additional mines shuttering operations. As these mines stop producing and supplies drop, prices will rise to reflect this change.
Takeaway: As costs rise, so do prices. Either precious metals will climb to levels where miners are profitable or they will stop mining and destroy supply levels. The price can certainly drop below the cost of production for a short time period, but it is not likely to last. This all-in sustaining cost usually proves to be a solid floor during corrections, so the downside is limited at this juncture. [As such, gold has nowhere to go but UP!]
All of the fundamental reasons to own gold and silver have only strengthened in the past two years. Against this backdrop, the sharp correction in prices over the past two years makes little sense. Whether or not the price is being surreptitiously suppressed is not the important point.
The bottom line is that:
- prices are not reflective of the fundamental economic conditions in the world today,
- no matter why this is occurring, it is not likely to last long,
- so investors should welcome the manipulation and take advantage of the fire sale prices while they last.
- As the gold price climbs back towards its inflation-adjusted high of $2,400, Shadowstats’ target of $8,000, or Mike Maloney’s target of $15,000, we will look back at this current correction as nothing more than a bump in the road and excellent buying opportunity.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*https://www.goldstockbull.com/articles/12-reasons-gold-will-make-new-highs-2014/ (Copyright © 2013 Gold Stock Bull – All Rights Reserved)
(Jason Hamlin: Not all mining stocks are created equally so I focus my research on best-in-breed companies with low all-in cash costs, rapidly increasing production, politically-stable jurisdictions and management with a proven track record. I also like the royalty and streaming companies that have been able to weather this storm fairly well. Their business model provides for limited downside risk and huge upside potential as their partner mines come online. If you would like to see which stocks I hold in the GSB portfolio, receive the monthly newsletter and email alerts whenever I am buying or selling, click here to sign up for the premium membership.)
The price of gold, on a quarterly basis, is 86% correlated – yes, 86%! – to total government debt going back to 1975… and a shocking 98% over the past 15 years!. Despite the current rumblings, everyone is aware that the debt ceiling will be raised and will likely surpass $20 trillion by the end of President Obama’s term. That would put the price of gold at about $2,000 per ounce. Read More »
A vicious upward debt spiral is gaining momentum. The budgets of most advanced economies, excluding interest payments, need 20 consecutive years of surpluses exceeding 2% of gross domestic product – starting now – just to bring the debt-to-GDP ratio back to its pre-crisis level. Read More »
I expect the eventual endgame to this whole Keynesian monetary experiment that has been going on ever since World War II [will] finally terminate in a global currency crisis. [That being said,] I’m starting to wonder if we aren’t seeing the first domino – the Japanese yen – start to topple…[It has] cut through not only the 2012 yearly cycle low, but also the 2011 yearly cycle low and never even blinked [and should it continue its steep decline] and break through the 2010 yearly cycle low [of 105.66] I think we have a serious currency crisis on our hands. Needless to say, if the world sees a major currency collapse… it’s going to spark a panic for protection – to gold and silver. Wouldn’t it be fitting that at a time when they are completely loathed by the market they are about to become most cherished? [This article analyzes the situation supported by 3 charts to make for a very interesting read.] Words: 620; Charts: 3
Highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked. Words: 1264 Read More »
The choice facing the leaders of the world’s largest economies is a simple one: Either they engage in massive money printing, or they let the world slip into another great depression. This article examines why they have no choice but to print money, something which will have significant consequences for everyone. Words: 560
That governments will want – and will NEED – much, much higher gold and silver prices in the future is counter intuitive, given that they have done everything within their power to throttle back and to keep a lid on bullion prices. Let me explain why. Words: 1300
Today, more than 60% of all foreign currency reserves in the world are in U.S. dollars – but there are big changes on the horizon…Some of the biggest economies on earth have been making agreements with each other to move away from using the U.S. dollar in international trade…[and this shift] is going to have massive implications for the U.S. economy. [Let me explain what is underway.] Words: 1583 Read More »