A Golden (Long-Term) Opportunity

As global jitters are escalating with economic uncertainty and market volatility, gold looks more attractive. But there’s a big difference between its short- and longer-term prospects.

Those analysts who believe that fear has made a comeback argue that gold is benefiting as equities slide and investors are increasingly concerned about the economic prospects of the U.S., China, Europe and Japan. Yet, even at $1,290, gold still remains more than 30% behind its all-time high of $1,898 in September 2011 amid the U.S. debt-limit crisis.

Although U.S. dollar has not strengthened as much as anticipated, the Fed’s rising rates have contributed to the fall in gold prices. In this view, a reversal may be unlikely because the investor assumption is that the Fed will continue to normalize, though perhaps slower than anticipated.

In the postwar era, such tightening meant a strengthening U.S. economy and a stronger dollar. But at the time, American economy was not haunted by budget and trade deficits or a debt burden. Today, it suffers from both twin deficits and a massive $22 trillion sovereign debt burden.

In this view, the Fed’s normalization may not herald increasing stability but contribute to instability and mixed signals in the U.S. economy. In that case, rising international uncertainty and volatility is likely to support an upward gold trajectory in the longer term.

Uneasy markets - and gold

Following the burst of the asset bubble in the U.S.(2008), Europe’s debt crisis (2010) and the U.S. debt-limit crisis (2011), markets plunged and gold soared until it peaked at almost $1,900 in September 2011. In the course of the past eight years, these fundamentals have not improved.

As central bankers in major advanced economies resorted to ultra-low interest rates and rounds of quantitative easing, markets tanked along with the oil prices, whereas gold soared. That period prevailed as long as central banks pushed cheap money and bought their multibillion-dollar assets, while major advanced economies supported their ailing economies with large fiscal stimulus packages. It was great for gold but bad for equities.

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Disclaimer: Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute ...

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