Macro forces are aligning, pointing toward one likely outcome — a major bull market for gold
Below is one of the most misleading charts in the financial markets today …
What you just looked at is the U.S. Dollar Index.
This index is a measure of the value of the U.S. dollar relative to the value of a basket of six major global currencies — the Euro, Swiss Franc, Japanese Yen, Canadian dollar, British pound, and Swedish Krona.
The one-year chart above shows the Dollar being relatively stable to these six global currencies, despite some coronavirus-related volatility in February and March.
So, what’s misleading about this chart?
Well, as you know, the U.S. government has recently been creating dollars out of thin air.
Lots of them.
The Fed has increased its balance sheet by $2.8 trillion, or 60%, since February. By the end of the year, we could be looking at somewhere around $3.5 trillion of newly created dollars.
Now, shouldn’t trillions of new dollars flooding the globe impact the value of the dollar?
I mean, being theoretical, this dollar-creation hasn’t been matched by an accompanying increase in U.S. economic productivity. It’s just a massive glut of newly created currency.
So, why is the trend-line in the currency chart above relatively flat?
Well, in part, it’s because central banks around the world are printing their own massive gluts of new currency.
According to French investment bank Natixis, the amount of global central bank money will increase more in 2020 than it has over the last 20 years — and that includes the 2009 crisis.
Natixis predicts the cash supply of major central banks is going to increase by 70% here in 2020. That is mind-boggling. Unfortunately, all this global printing is hiding a critical truth for investors today.
To illustrate what it is, let’s digress a moment …
***Say you have two children about a year apart in age, both hitting their adolescent growth spurts at the same time
At the beginning of month one, you measure their heights relative to each other. They’re about equal.
Three months later, you measure them again. Relative to each other, they’re still about equal. So, you come to a simple conclusion …
Your children haven’t grown at all.
Of course, had you penciled-off their height against a wall, you would have seen them both experiencing a massive growth spurt. But since they both grew at the same pace, and you were measuring them only relative to each other, you came to a faulty conclusion — no growth.
When it comes to our basket of “stable” global currencies, what “wall” can we use to get a real measure on what’s happening in the world?
Well, how about gold?
Below is a chart of gold priced in the majority of major global currencies — the U.S. Dollar, the Australian Dollar, the Canadian Dollar, the Renminbi, the Pound, the Yen, and the Euro.
You want to see a growth spurt? Well, here you go …
What investors need to see today is that although currency exchange rates are somewhat stable relative to each other, if we compare them to gold, we’re seeing them lose value as gold shines. And this has enormous implications for investors looking to preserve the purchasing power of their wealth.
Here’s our global macro specialist, Eric Fry, for more:
Although all major currencies are maintaining their values relative to one another, they are all losing value relative to gold.
During the last 12 months, the gold price has soared 33% against the U.S. dollar. But the ancient monetary metal has produced even larger gains against the euro, British pound, Canadian dollar, and Chinese renminbi.
In fact, the gold price is now trading at new all-time highs against every major currency except the U.S. dollar …
But now that the COVID-19 health crisis has morphed into a global economic crisis, the world’s governments and central banks are pledging virtually unlimited “resources” to combat a recessionary fallout.
As such, the gold market may be on the threshold of entering a 2009-style bull market.
***Are we about to see a replay of 2009? Or something even bigger?
In Eric’s update from Tuesday, he revisited the gold bull market from a decade ago.
He noted how in February 2009, gold hit a new record high above $1,000 an ounce.
Three months later, the stock market had bounced more than 30% from its bear-market lows and the crisis appeared to be ending.
That must have been the right time to lock in your gold gains and move on, right?
Nope. The gold bull market was just getting warmed up thanks to monetary factors — specifically, Federal Reserve Chairman Ben Bernanke and “quantitative easing” (QE).
Eric reminded his readers that even though gold was trading near a record high in early 2009, it would double over the next two years.
Back to Eric:
Some version of this history may be about to repeat itself …
The Federal Reserve, along with other major central banks around the world, are now implementing very large and aggressive QE programs.
And most major governments are also throwing trillions of dollar of debt-financed rescue packages and stimulus measures at the global economy.
… these titanic monetary and fiscal efforts should boost the relative value of gold over the next year or two.
***Why “the next year or two” may turn into far longer
What’s one of the biggest killers of a bull market in gold?
Higher interest rates.
After all, gold produces nothing. It churns out zero cash-flows. So, when compared to some financial asset that’s paying an investor, call it, 5% dividends, gold offers far-less appeal.
As we look at the world today — and for as far out on the horizon as the eye can see — do you see higher interest rates anywhere?
I suspect not.
That’s because the coronavirus has given global central banks a massive reason to keep them low — they literally cannot afford higher interest rates.
Central banks around the globe have suddenly unleashed at least $15 trillion of stimulus via bond-buying and budget spending. Experts predict that here in 2020, we may see the global debt-to-GDP ratio rise to 342%.
To put it simply, global governments are drowning in debt.
If the interest rates that these governments have to pay climbs substantially, we’d be looking at potential insolvency, or the need to hyperinflate a currency immediately to service the debt.
Option A, destroy a central bank. Option B, destroy a currency.
Given this, governments will do all they can to keep rates low. And that will remove a major headwind for gold, potentially paving the way for not just a year or two of gains, but perhaps a decade’s worth.
We saw such a gold bull in the 70s when gold climbed 1,755% from December of 1969 from through September of 1980.
We saw another in the 2000s, when gold tacked on 611% from August 1999 through August 2011.
Given today’s unprecedented fiat currency creation and global debt levels, it’s reasonable to believe gold could be in the early stages of a steep — and lengthy — climb.
***If you’re looking to invest in gold, the ETF GLD is an easy option
But it’s not necessarily the most lucrative option.
We first recommended GLD here in the Digest back in January 9, 2019. Since then, it’s climbed 35%.
Meanwhile, one of Eric’s gold-related recommendations in his Investment Report newsletter is up double that — 72% — since just last summer.
Remember that when it comes to investing in gold, there are lots of options — GLD, gold miners, junior gold miners, gold royalty companies, actual bullion, collectible coins …
While some of these gold investment vehicles generally climb faster and higher than others, the bottom line is they’re all likely headed higher. So, if gold isn’t in your portfolio today, please consider it.
Here’s Eric with the final word:
Investors rarely buy gold because they want to.
They buy it because they have to.
We have entered one of those rare episodes. Gold has become such a compelling trade in the current environment that it is difficult to walk away from it …
Have a good evening,