How gold could hit $10,000 in 18 months
- Central banks and gold
- Trillions of dollars in paper wealth
- The great gold hoax
- Gold – new all time high in Aussie dollars?
- Gold heading to US$10,000
Gold flying to US$10,000 per ounce in the next year and half?
Impossible, you say. There’d be panic in the streets. Pandemonium in society. Petrol would be $200 per litre, a loaf bread would be pushing $50.
More importantly, what would that mean for the cornerstone of our global fiat currency system — the US dollar?
I’m going to get Jim Rickards to answer all that for you.
But before he does, let’s look at the markets…
Overnight, the Dow Jones Industrial Average gained 98.76 points, or 0.54%.
The S&P 500 was up by 14.06 points, to 2,177.18.
In Europe, the Euro Stoxx 50 index was down 69.21 points, to 3,051.69. Meanwhile, the FTSE 100 was up by 76.63 points, or 1.12%. Germany’s DAX index was up 237.69 points for a total gain of 2.2%.
This morning, Japan’s Nikkei 225 index is up 1.91%, or 315.47 points. China’s CSI 300 index is up 24.48 points, to 3,291.12.
Back home, the S&P/ASX 200 opened up five points and is currently trading at 5,379.10.
On the commodities markets, West Texas Intermediate crude oil is trading for US$45.92 per barrel. Brent crude is US$47.52 per barrel.
Gold is US$1,336.98 (AU$1,748.91) per troy ounce. Silver is US$19.87 (AU$25.99) per troy ounce.
The Aussie dollar got a boost overnight, and is now trading at 76.46 US cents.
Central banks and gold
You might have noticed I’ve yapped on about the Fed this week.
As we’ve got our own central bank — the Reserve Bank of Australia — it might seem absurd that I spend so much time talking about a foreign central bank’s policy movements.
I mean, what does that matter to you?
The Federal Reserve Bank is the most powerful central bank in the world. You’ll notice too that, unlike other countries’ central banks, the Fed doesn’t have its nation’s name in the title.
There’s the Bank of Japan, the Bank of England, the European Central bank and even the People’s Bank of China. I won’t go into the irony that they call it ‘the people’s’ bank in China.
But in the highly patriotic US, it’s the Federal Reserve Bank. And that’s it. A seemingly innocent name, and one with no specific national identity.
I’m not eluding to any conspiracy theories here. I’ve read enough of those to last several lifetimes.
The point is, when the Fed speaks those involved in the markets — investors large and small — listen, interpret and act upon what they think the Fed means. And these actions filter through the global economy.
But it’s not always obviously until later.
One section of the market that moves with the powerful Federal Reserve Bank, is gold. Take this from Bloomberg yesterday:
‘Gold held the biggest advance in two weeks after the Federal Reserve passed on the chance to boost borrowing costs and lowered its outlook for long-term interest rates, bruising the dollar.
‘Fed policy makers scaled back the number of increases they anticipate for 2017 after an expected hike later this year.’
You can pretty much rule out an increase in rates at the November meeting. As I mentioned in Port Phillip Insider yesterday, Jim still isn’t convinced the Fed will raise rates in December this year.
All of this means good thing for the price of gold…
Trillions of dollars in paper wealth
Overnight, Bloomberg published an article, pointing out that you’re not as rich as you thing.
‘Yes, the postwar generation is wealthier than any before it. But the ultimate value of any investment depends upon being able to convert it into cash and thus generate purchasing power. In fact, the world’s accumulated wealth — around US$250 trillion, according to Credit Suisse’s Global Wealth Report — is almost certainly incapable of realization at its paper value.
‘Most of these savings are held in two forms: real estate, primarily principal residences, and retirement portfolios that are invested in stocks and bonds.’
Imagine that, a global wealth of US$250 trillion, but it’s almost all tied up in property and superannuations holdings of stocks and bonds.
I recently tried digging around for the numbers on private gold ownership in Australia. I couldn’t find anything. The closet I came to an answer was a guess in a YouTube video, and that was related to the US. The video placed private gold ownership at 2% of the US population. Even then, the presenter said it’s likely that most of this group really only had a gold coin or two as a novelty investment.
The great gold hoax
Not long ago, Jim Rickards had the unique opportunity to visit a gold vault in Switzerland. It was nothing like the Perth Mint, where you rock up and pay for a tour.
Oh no. Jim was whisked away to a secret location in car with blacked out windows. He was driven somewhere out of Zurich — he still doesn’t know the exact location. There, he met with his long term colleague, a man we only know as ‘Goldfinger’. Once Jim arrived at this secret location, he had to run through a gauntlet of state of the art security.
Finally, after being cleared for entrance, Jim was let inside a vault with millions of dollars of physical bullion sitting inside. After this tour, Jim and Goldfinger discussed the state of the gold market.
Goldfinger is possibly the most connected person in the gold industry. While he only met with Jim on the condition he remained anonymous, Goldfinger shared previously confidential information with Jim that he believes investors should know.
To bring this message directly to you, we recorded an exclusive video with Jim, where he shares exactly how spot gold has disconnected from the paper gold price, and the looming dangers in the market few can see.
We’ve been playing these videos for you this week. In case you missed them, you can catch up here.
Make sure you take the time to watch them all. I said above, possibly only 2% of the US population owns physical gold. Well in this series Jim explains where all the rest of this precious metal sits…
Gold — new all time high in Aussie dollars?
Did you know that the price of gold in Aussie dollars is only 4% lower than its all time high? Have a look at the chart below. It shows you the 10 year spot gold price in Aussie dollars.
10 year spot gold chart – Aussie dollars.
Click to enlarge
That’s impressive. The last time that Aussie dollar priced gold was at this level, the AUD to USD exchange rate was sitting around $1.06. Meaning that for every $1.06 you had, you could buy US$1.
With the Aussie having fallen a long way from that level, the value of gold in Aussie dollars is only getting better. And I wouldn’t be surprised to see the Aussie dollar gold spot price reach a new high in the coming weeks.
Based on Jim’s analysis, he reckons there’s a super spike coming in the gold price. The exact timing he doesn’t know. However, he believes investors should be prepared for a massive run up in the gold price.
Now don’t get me wrong, for the year to date a 20% gain in the Aussie dollar gold spot price is impressive. But if you know where to look, there are much better gains to be had.
As Jim explains below, one way of doing this is by investing in gold mining stocks. You can’t just pick any one at random though. You need to know where to look.
Like this tiny microcap stock, Dampier Gold [ASX:DAU]. It’s up 300%. Another tiny microcap stock, Aphrodite Gold [ASX:AQQ] is up 130%. And Ramelius Resources [ASX:RMS] is up a tidy 117%. And that’s just this year!
All these companies have returned triple digit gains in nine months. That’s very impressive. More so when you realise that the S&P/ASX200 is only up 1.48% in the same time.
The point is, if you want these sorts of highly speculative gains, you need to know where to find them. Luckily, Jim and I have been working on an exciting project for you. Together we have put together a team that knows the exact pockets of the ASX where you have the best chance to find these gains.
It’s an incredible project. Unlike anything you’ve ever seen before. Keep an eye on your inbox tomorrow for all the details.
Gold Heading to US$10,000
Imagine turning on the financial news tomorrow and seeing the headline, ‘Gold at US$10,000 an Ounce’.
It may sound like nothing more than a gold bug’s fantasy. But according to my research, it’s actually not far-fetched. In fact, with some solid reasoning and basic mathematics, US$10,000 gold looks like a near certainty.
The only real question in my mind is the timing…how long will it take for gold to hit US$10,000 an ounce?
One near-term launching point could be 30 September 2016, when the yuan enters the IMF’s Special Drawing Right (SDR) basket of currencies. Like lots of central planning, it won’t go well. I foresee the dollar unhinged, crashing markets, extreme gold and silver shortages, soaring real asset prices and, eventually, the world returning to the gold standard.
Of course, it could happen much sooner. Or it could happen much later than I expect. There’s always a chance that central bankers could figure out a way to placate investors for a little longer. The right amount of desperate policies and soothing words might even be enough to push gold back into a bear market — at least temporarily.
The catalyst for gold
Investors have long understood that gold is an excellent hedge against inflation. The analysis is straightforward. Inflation is caused, in part, by excessive money printing by central banks; something central banks can do in unlimited amounts. On the other hand, gold is scarce and costly to produce. It emerges in small quantities.
The total growth in global gold supplies is about 1.5% per year and has been slowing lately. Compare this to the 400% growth in base money engineered by the Federal Reserve since 2008, and it’s easy to see how a lot more money chasing a small amount of gold will cause the dollar price of gold to rise over time.
But this is not the only driver of higher gold prices. There are at least three other catalysts — extreme deflation, financial panic, and negative real interest rates. A brief look at all three scenarios will give us a more robust understanding of gold’s potential price performance.
Mild deflation might cause the nominal price of gold to decline, although it may still outperform other asset classes that go down even more. But extreme deflation, say 5% per year or more over several years, is a central bank’s worst nightmare. This kind of deflation destroys tax collections because gains to individuals come in the form of lower prices, not higher wages, and governments can’t tax low prices.
Deflation also increases the real value of debt, which makes repayment harder for individuals, companies and governments. As a result, defaults increase and those losses fall on the banking system, which then has to be bailed-out by the Fed.
This lethal combination of lower tax revenues, higher debt burdens, and failing banks is why the Fed will fight deflation with every tool at its disposal.
So far, the Fed has been trying to fend off deflation by using its inflation playbook including rate cuts, money printing, currency wars, forward guidance, and Operation Twist. All of this has failed. Deflation still has the economy in its grip. But when all else fails, central banks can cause inflation in five minutes simply by voting to fix a gold price of, say, US$10,000 per ounce.
The Fed could make the price stick by buying gold at US$9,950/oz. and selling it at $10,050/oz., in effect becoming a market maker with a band around the target price.
f the Fed did this, all other prices including silver, oil, and other commodities would quickly adjust to the new price level causing 150% general inflation – problem solved! Don’t think of this just as an ‘increase’ in the price of gold; it’s really a 80% devaluation of the dollar measured in gold.
If this sounds far-fetched, it isn’t. Something similar happened twice in the past 80 years; in 1933-1934 and 1971-1980.
The second scenario for higher gold prices is financial panic. This does not rely on any technical economic analysis; it’s a simple behavioural reaction to fear, extreme uncertainty and investor aversion to loss. When panics begin gold often declines slightly as leveraged players and weak hands dump it to raise cash to meet margin calls.
But, quickly the strong hands emerge and gold rallies until the panic subsides. It may then plateau at the new higher level, but the objective of preserving wealth when other asset classes may be in chaos has been accomplished.
The third driver of higher gold prices is an environment of negative real interest rates. This is a condition where the rate of inflation is higher than the nominal interest rate on some instrument. I use the ten-year Treasury note for this comparison.
Right now real rates are steeply positive since ten-year note yields are about 2% and inflation is slightly negative. This is a headwind for gold, but the Fed is determined to cause inflation while keeping a lid on Treasury rates with financial repression. The Fed wants negative real rates to encourage ‘animal spirits’. Investors know that it’s usually not smart to fight the Fed. In any case, the Fed will keep trying, which could make asset bubbles worse.
So gold does well in inflation, extreme deflation, panic, and an environment of negative real rates. Is there a scenario where gold does not do well? Yes. If the Fed brings the economy in for a soft landing, achieves trend growth of 3% or more on a sustained basis, avoids deflation, avoids inflation and engineers a positive sloping yield curve with positive real rates, then gold will have no immediate reason to rally. Is this possible?
Yes, but highly unlikely. Deflation is the immediate danger. Fighting deflation probably means overshooting on the inflationary side next. Bubbles are everywhere and could burst leading to panic at any time.
Trend growth will not resume without structural changes to the economy that are precluded by a dysfunctional political system in Washington. Even if the Fed’s rosy scenario did emerge, gold could still rally based on foreign buying, diminished floating supply of physical bullion, and the potential for a short squeeze.
In short, a balancing of all of the possible financial outcomes from here argues strongly for including gold in your portfolio at this entry point. There are many ways to own gold or have price exposure to gold including physical bullion, ETFs, and gold mining stocks.
Some gold stocks outperform the metal itself. You just have to know where to look.
All the best,