Record high debt and record low yields are the real tailwinds for goldWith no shortage of tailwinds to choose from, Forbes contributor Frank Holmes picked the record high domestic debt and record low global yields as the two factors that could bring gold to unheard-of levels. While the metal has recently sprung well above $1,500 for the first time in six years, Holmes thinks there is much more in store for gold. According to the analyst, one factor that will contribute to massive price gains will be the explosion of domestic debt. The U.S. national debt recently passed $22.5 trillion while the federal budget deficit for 2020 passed $1 trillion, two unprecedented issues that could very well be exacerbated with promises of more government spending in the form of new programs. Additionally, corporate bond yields have sunk to all-time lows, and companies made the most of this development by rushing to borrow as much money as they could. Giants like Apple, Deere, Walt Disney and Coca-Cola have been among the 49 companies that borrowed as much as $54 billion through the past Wednesday, a move that made many remember how big of a role corporate debt played in the 2008 crisis. Sovereign bond yields around the world appear to be approaching negative territory, while the central banks that issue them continue to debase their currencies through easy money policy. Holmes expects these infinite-supply assets to become less and less appealing as the institutions behind them lose credibility among investors. In contrast, gold’s ever-present scarcity and independence will continue to draw investors towards it, as Holmes believes that the global currency debasement that is currently taking place will bring gold’s price to $10,000 in the coming years.
Jim Rickards thinks the world is unprepared for the next financial crisisIn a recent interview with Small Caps, finance expert Jim Rickards shared his view that the world is approaching a third financial crisis, one that will be far worse than its predecessors. Rickards is far from alone in this opinion, as numerous experts have warned that economic red flags are rising across the globe. As Rickards notes, the markets were completely unprepared for the previous two crises. The 1997-1998 Asian financial crisis hit the stage fast and hard, and had Wall Street banks not banded together to bail out U.S. hedge fund Long-Term Capital with $3.75 billion, the entire global economic system could have collapsed. The next financial crisis, which the markets are still reeling from a decade later, was largely brought on by private banks, and a collapse was once again averted with a multi-trillion bailout from central banks. Rickards believes that the third financial crisis, however, will not be brought on by a corporation, but rather by central banks and their questionable policies. Here, the only rescue scenario would come in the form of a bailout by the International Monetary Fund (IMF), which would be much more difficult to achieve as various nations could veto the bailout or only allow it under certain conditions. Whatever happens, Rickards envisions a scenario where the U.S. dollar will at least move away from its global reserve currency status, if not become worthless altogether. Here, gold and silver will once again take center stage, yet the sheer amount of chaos and turmoil will render their derivatives void and null. The battle, instead, will be fought for bullion. Rickards believes the battle is already being fought, as central banks around the world have been consistent net buyers of gold bullion since 2010. Examples of Russia tripling its gold reserves to 2,300 tons and Iran buying over 100 tons come to mind, yet Rickards notes that many of these countries are not fully transparent in their purchases and could in fact be buying far more bullion than officially reported. Even in the absence of a financial crisis, Rickards believes that the stage is set for gold to pass $10,000. The previous two great bull markets in gold saw the metal rise by 2,000% between 1971 and 1980 and 700% between 1999 and 2011. Based on rigorous analysis of fundamentals, Rickards thinks we are in the midst of a third run of this magnitude, which started in December 2015. Applying the same percentage formula to the current run, Rickards arrives to the conclusion that gold could surpass $14,000 in a matter of years.
China’s gold-buying spree adds nearly 100 tons of bullion to the country’s reserves since DecemberIn December 2018, China made its official return to the gold market after several years of absence, bolstering its reserves from 59.24 million ounces to 59.56 million ounces in the span of a month. Since then, the People’s Bank of China (PBOC) has made consistent multi-ton purchases on a monthly basis, as Beijing’s trade disputes with Washington continued. By the end of August, China had added nearly 100 tons of gold bullion to its reserves in a bid to diversify away from the dollar and protect itself from trade war-related complications. In doing so, China quickly made a claim for the world’s top gold buyer, as its purchases now rival that of Russia, a perpetually gold-buying nation that has claimed the top spot in terms of bought tonnage over the past several years. According to John Sharma, an economist at National Australia Bank, there is more to central bank purchases than simply the threat of sanctions or restrictions. Last year, central banks around the world doubled most forecasts by buying over 650 tons of gold by year’s end, and Sharma believes they are doing so due to growing political and economic uncertainty. Whatever the case, central bank bullion purchases have acted as reliable support for gold prices for the better part of a decade, and the recent increase in official sector demand is likely playing its part in pushing gold to its recent six-year highs.
bonds, financial crisis, gold price, us debt