From Birch Gold Group
This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Gold’s bull market to stretch throughout 2021, what gold is truly a hedge against, and $40 silver is a distinct possibility next year.
Goldman Sachs sees three reasons for gold to continue its bull run in 2021
In a note released on Friday, Goldman Sachs analysts attributed gold’s sideways movement in the $1,850-$1,920 range over the past few weeks to the absence of any significant catalysts that would influence the metal’s price by a wide margin. However, the team sees three reasons for gold to continue the bull run that started last summer well into 2021.
“In this cycle, we believe the gold market, at least initially, is likely to follow the same path as after the Great Financial Crisis and grow strongly into the recovery phase of the business cycle as inflation concerns become central to the forecast,” said the team, listing expectations of a bounce in the inflation rate to 3% as the first reason. Comparisons to the financial crisis definitely bode well for gold, as the metal experienced three years of a consistent uptrend before winding up in a much higher price range.
Like many, Goldman’s analysts predict the weakening greenback to continue its downtrend in 2021, listing its depreciation against other currencies as the second reason why their team is long gold. Just as important, Goldman finds it likely that gold demand in emerging markets will recover due to a combination of Joe Biden’s policies pertaining to the U.S. dollar and trade and vaccine developments.
Despite gold posting consecutive new all-time highs, demand from India and China, two of the metal’s top buyers, has greatly diminished as the nations’ economies slowed down this year. Because retail demand is especially present in these nations, Goldman believes that their recovering economies and an increase in average household wealth will play a role in pushing gold to $2,300 over the next 12 months.
More than anything, gold is a hedge against bad government decisions
As Bloomberg’s Jared Dillian notes, while gold’s role as a hedge is undisputable, the scenarios it is hedging against are open to debate. Gold is frequently cited as a hedge against both inflation and stock market crashes, and while the views aren’t necessarily incorrect, Dillian finds gold to primarily act as a hedge against irresponsible government actions.
To exemplify this, Dillian looks back to both the past 20 years and the past century. Over the latter stretch, gold has outperformed stocks in massive fashion, gaining around 555% compared to 79% for the MSCI All-Country World Index of stocks and 146% for the S&P 500 Index. This is readily attributed to government policies, and Dillian contrasts the current environment to that of 2000 to show just why gold continues to outperform decade after decade.
A dominant greenback, a 6.5% targeted federal funds rate and a relatively balanced federal budget that marked the year 2000 seem almost foreign in comparison to the present day. Now, interest rates are at or below zero, depending on the gauge used, expectations for the dollar grow ever weaker, and the federal budget deficit sits at a record $3.1 trillion.
While it’s easy to make arguments for lower interest rates and a weaker dollar from an economic standpoint, the opposite arguments are just as valid, if not more so. High interest rates and a strong dollar not only encourage saving, but also hold U.S. companies to much greater accountability. For government officials, however, printing more money as a way out of every scenario is the easiest solution, and therefore tends to be the one most utilized.
A divided government is perhaps the biggest subduer of high inflation expectations, yet gold went up immediately after the election results as more deficit spending, and therefore more inflation, seem like the determined course of action. Instead of promoting an environment where people create the wealth, the government has simply chosen to create the wealth on its own by printing money. As long as this trend continues, which looks to be a very long time, gold and other absolute stores of value will continue to prosper against the ever-depreciating currencies.
Expert sees multiple reasons for silver to reach $40 next year
Peter Hug, global trading director of Kitco Metals, believes silver has more dazzling performances to show after hitting a seven-year high. Although both metals have pulled back from their highest point, they remain exceptionally well-supported, with silver bouncing back and finding buyers whenever it drops to around $24.
In a recent interview, Hug cited a multitude of factors that could push silver much higher, starting with another spike in gold prices in the near-term. “If silver can hold this $24-$25 range and then gold gains some momentum and gets back over $2,000, I think a $35-$40 number on silver, first quarter next year, is totally within the realm of possibility,” said Hug.
Being an inflationary hedge, silver also stands to benefit from drops in the greenback, as many are forecasting weakness in the U.S. dollar due to a persistent loose Federal Reserve monetary policy, a multi-trillion dollar stimulus issued this year and talks of another fiscal package of similar magnitude.
While a stimulus-driven economic recovery would hurt fiat currencies, it would benefit silver due to its strong industrial component. Supply may have picked up on the investment side compared to the abject bullion shortage seen earlier this year, but Hug highlighted that silver-producing operations are difficult to start, especially in the current climate. A rapid increase in demand from either investors or manufacturers could quickly create yet another shortage and push silver prices upwards, along with creating sizeable premiums on the metal not unlike those seen in the gold market some months ago.