Gold: Ready For Take-Off, Or Is It Another Big Flake Off?

Fundamentals

Fundamentally, gold and silver have a bullish future. There are shortages in both sectors, which should drive prices higher. They are also attracting buyers with prices moving up in gold and silver. We recommend holding onto your long positions in precious metals.

brass metal frame

Image Source: Unsplash

Monetary policies also appear to be bullish for precious metals. Gold is a flexible instrument and has been a currency for thousands of years. Fiat paper currencies, such as the US dollar, have been losing value since the US went off the gold standard in 1971. The entire economy is now based on fiat money and debt. The economy is sustained by debt provided by central banks. What we saw last March was the Feds opening up floodgates of easy money. Now more and more cash is chasing a finite number of real assets, such as real estate, fine art, precious metals and commodities.

Courtesy: TDAmeritrade

After gold hit $1167 it shot up above $2089 on the basis of the Fed printing more and more money through stimulus packages. The Fed is creating money out of thin air and, in doing so, devaluing the US dollar, as well as the assets valued in that currency. Inflation is already here if you look at commodities. Corn, wheat and oil are all shooting up, but those increases are caused by the continuing devaluation of the dollar and more dollars chasing fewer real assets.

Globally, central bankers have accelerated the amount of money that is coming into the system. We are looking at a potential situation like Japan in the 1980s, which went into a stagnant economy for more than twenty years. No matter how much stimulus the government provided, people did not spend money and Japan was in a situation of stagflation for two decades.

The Feds face a painful dilemma. They have to keep the economy going, provide stimulus, all while not raising interest rates. If they raise interest rates, then the massive amount of debt will lead to defaults rippling across the world. The problem is that, with interest rates already so low, the Feds don't have many options to influence the economy. If interest rates rise even a tiny bit, the cost of that debt will explode and defaults will mount quickly with every percentage increase in interest rates. Even a three or four percent rate increase will devastate the global economy and will be unsustainable.

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Disclosure: I am/we are long GDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company ...

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