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It’s easy to make fun of gold bugs, but their time may finally have come. The precious metal has broken out recently amid higher-than-expected inflation in the United States and general anxiety about everything from geopolitics to the November presidential elections to the future of monetary policy and markets .
All of these things are predictable reasons for gold to rise. But this rise carries deeper, longer-term messages that investors should pay close attention to.
Let’s start with inflation. Whatever happens in the coming quarters, I’ve long thought we’re in for a period of “higher and longer” inflation. Aside from the possibility of a technology-driven productivity miracle, it is difficult to imagine a macroeconomic trend right now that is not inflationary.
The economy is booming – from fiscal stimulus in the U.S., to increased redundancy in supply chains as countries de-risk, to all the capital investment required for the transition towards clean energy and reindustrialization in rich countries. Even America’s aging baby boomers are likely to be an inflationary force, because they have health, time and plenty of money to spend.
Gold is historically a hedge against inflation. But it’s also something investors turn to when they’re worried about the stability of the status quo. It will languish for decades, then erupt when the world finds itself at a major turning point, as it is now.
It’s no secret that the Washington Consensus – which expected emerging nations to align with free market rules written by the West – and the post-war Pax Americana are over. . Trade tensions between the West and China are increasing. At the same time, the militarization of the dollar following the outbreak of war in Ukraine accelerated the trend in many countries, notably China, to sell Treasury bonds and buy gold to protect against financial power American. It’s easy to imagine that this weekend’s escalating tensions in the Middle East will further strengthen gold.
This pendulum swing is leading many analysts to predict a massive rise in gold. BNP Paribas Fortis chief strategist Philippe Gijsels and fellow chief economist Koen De Leus — the authors of The new global economy in 5 trends — predict that gold will rise from its current price of around $2,374 per ounce to $4,000 in “the not-so-distant future.” As Gijsels says, “It’s not just about interest rates. People are protecting themselves against a new world.”
I read with interest a tweet last week from economist Brad Setser, who noted that China’s holdings of U.S. financial assets as a percentage of its gross domestic product had returned to where they were when the country joined the World Trade Organization in 2001. of course, this money was turned into gold (much of it was taken out of foreign exchange reserves and went to troubled Chinese banks). But it speaks to this changing world.
As a recent report from Currency Research Associates noted, “China buying gold and selling Treasuries mirrors the way European central banks began swapping dollars for gold in the late 1960s , as the Bretton Woods system began to disintegrate. »
Indeed, this was the start of gold’s last long and sustained rise, between 1968 and 1982, when it appreciated against the Dow Jones and the dollar. There are other ways in which this time period corresponds to today. In 1971, when then-President Richard Nixon took the United States off the gold standard, he also imposed a 10 percent tariff on imports. This was a sort of unofficial devaluation of the dollar aimed at protecting products made in the United States from exchange rate fluctuations.
Donald Trump has of course proposed a generalized 10% customs duty on imports if he is elected for a second presidential term. He also denounced how a strong dollar penalizes American manufacturers abroad. But Treasury Secretary Janet Yellen’s recent trip to Beijing to protest Chinese dumping underscores that the Biden administration is also worried about American industries and workers. I wouldn’t be surprised to see some dollar depreciation, regardless of who wins the White House. This too would be good for gold, which tends to rise when the dollar weakens.
The final reason to be bullish on gold is the US debt and deficit situation, which is quickly becoming unsustainable. The most recent projections from the Congressional Budget Office put the U.S. debt at 99 percent of GDP by the end of this year, and it is on track to reach 172 percent by 2054. If that happens, the result would be monetization, inflation, financial repression and a period of extreme chaos in monetary policy and markets. Bad for the world; good for gold.
Is there any hope for a different outcome? One could imagine that inflation would eat away part of the debt. But higher rates for a longer period would create an even more unsustainable fiscal situation, since asset prices and therefore tax revenues would likely fall.
Luke Gromen, author of an investment newsletter called “The Forest for the Trees,” says that since the only thing that can be cut from the U.S. budget is interest payments (reductions in benefits social and defense spending are not politically viable). , the Federal Reserve will ultimately be forced to change direction and lower interest rates so that the United States can avoid a debt death spiral.
Still, more easy money would undoubtedly be good for gold. In this strange moment of economic and political paradigm shift, it seems that most things are.