While more than a decade has passed since the Great Recession, we are still in its shadow. Sure, the stock markets are at record highs, but many people who lost their homes and jobs are still struggling in the aftermath of the worst crisis in decades.
Federal Reserve and Quantitative Easing
The measures that the Federal Reserve introduced over ten years ago to revive the economy are also still in place as the central bank has gone back to its quantitative easing policy and expanded its balance sheet several times over the past year. The moves were initially prompted by the market drop in late 2018 and by the complete freezing of the junk bond market, where not a single bond was sold for over 40 days, so the Fed lowered interest rates to add liquidity to the market. Recently, the Fed even went back to printing money to add it to the Repo markets to calm fears about another recession.
The situation is similar in Europe and Asia, where central banks have cut rates, in some places, into negative territory. It should be noted that for Europe, Asia, and the US, earlier in 2018 central banks had planned to tighten their monetary policies, and no one saw this U-turn coming. Instead, we are now experiencing one rate cut after the other, and some officials, including the Federal Reserve Banks of St. Louis and San Francisco, have called for even lower rates. Combine that with our President’s call for negative rates, and we may very well see those as soon as the economy slows.
Should the Fed implement negative rates, you’d lose value in your cash holdings as the purchasing power of the dollar will decline, and you’d earn more money holding gold, which is unaffected by interest rates.
Central Banks are Purchasing Gold
Major investors are seeing this picture clearly. Over the past year, the gold price has risen significantly, partly due to buying sprees by central banks across the globe, who, undoubtedly, are the most sophisticated investors. In fact, the last time we saw central banks conducting gold purchases of this magnitude was during World War II.
That is to say, central banks—who control the printing of money—are converting the paper money they are printing to physical gold. And don’t be confused: central banks don’t buy ETFs or gold shares. They buy the real thing and hold it. Hereby, they are reinforcing their balance sheets with gold and its 5,000-year history as the preferred safe-haven asset.
That’s the first reason we’re bullish on gold.
The other reason is that gold miners are simply not discovering new gold. For the past few years, gold and gold stock were unpopular, so mining companies are short on money and have cut their exploration budgets to their lowest in over a decade. Thus, they are finding less gold. Typically, it takes ten years to start producing gold from a new gold mine, so when demand picks up, the supply of gold will be insufficient, and the gold price will jump. For many investors, this is reason enough to buy gold.
Some of the biggest players in the gold industry say that gold production has peaked, and with central banks on a gold-stockpiling rampage, several prominent investors are onboard as well, including billionaire Sam Zell and veteran investor Mark Mobius.
It’s simple: a sudden huge demand for gold—whether due to a financial crisis or to uncertainty—combined with diminishing supply will lead to gold prices at a level we have never seen before.
Gold is an Exceptional Indicator
Historically, gold is an exceptional indicator of central bank policy. For instance, gold rose from $1,200 right before Fed Chair Jerome Powell reversed the Fed’s policy in January 2019 (when the central bank went from increasing rates to cutting them) to almost $1,300 an ounce. And today, after several rate cuts and balance sheet expansions, gold is above $1,560. Once it goes higher, we believe all hell will break loose.
I can give you a professional recommendation based on my 15 years in the gold industry that you should add gold to your investment portfolio while gold is still available at today’s relatively low prices. Gold is the perfect hedge, and with the right amount, your portfolio will be protected and can even appreciate when stocks and bonds decline.
