Wall Street economists see the Federal Reserve continuing to cut interest rates after the July cut, its first move lower in 11 years. The Fed cut the Federal Funds Rate in July, to the current target range of 2% to 2.25%. UBS sees at least three more cuts ahead, while Morgan Stanley is indicating a possible return to the near-zero rates that prevailed from 2008-15. Economists see the likelihood of three quarter-point reductions before the end of the year, along with multiple moves in 2020, until it becomes clear the U.S. central bank has staved off a recession. Gold has rallied from $1,300 to $1,500 on the prospect of lower interest rates.
According to an analysis from Bank of America, the Fed may be forced to launch Quantitative Easing this year, as soon as the fourth quarter, to provide the market with much needed liquidity. Open Market Operations dealers demand for cash to finance the Treasury's funding of the deficit has apparently exhausted excess banking reserves. B of A expects a $200 billion liquidity drain over the next two months will be so sever, the Fed may have no choice but to resort to QE. QE is the monetization of the deficit by the Federal Reserve. Banking reserves held in the Federal Reserve divided by total banking assets recently fell below 9% for the first time since the beginning of 2011. Liquidity conditions in the U.S. banking system are close to their tightest in a decade.
At the beginning of 2019 Global Liquidity began tumbling at its fastest rate since the 2007/2008 Financial Crisis. With the world economy slowing, interest rates dropping, and central banks printing money, the price of gold is rising. When we look at the price action of gold over its past bull cycles, it gives us an approximate sense as to how high gold will go in this current cycle, and how long one should expect the price action to occur. Past gold cycles have lasted from three to eight years with upside in price ranging from 5 to 9 times. This would put the price of gold in the range of $4,000 to $9,000 from the low set in December 2015.
Many investors are looking at Barrick Gold Corporation and Newmont Goldcorp as excellent proxies for gold with the advantage of leverage. If the price of gold increases mining companies make larger profits, their reserves increase in value, and because of long term debt they have additional leverage. In 2019 Newmont and Barrick announced a joint venture called Nevada Gold Mines allowing the two partners to share facilities and infrastructure in Nevada to cut cost. Thanks to synergies between these operations, the deal is expected to generate around $5 billion in cost savings, which will be shared by the two companies and will generate an estimated 4 million ounces of gold annually. This makes it the single largest gold producing operation in the world, pending regulatory approval. In addition both mining companies expect to eliminate billions of dollar of debt from cash flow, and the selling off of non-essential world wide mining operations. Barrick Gold produced 4.53 million ounces of gold in 2018 with a cost of $806 per ounce. Profits will increase with larger production, cost savings, and the current price of $1,500 gold. In 2018 Newmont Mining produced 5.1 million ounces of gold with a cost of $909 per once. After the merger with Goldcorp, Newmont became the world's largest gold mining company. I am long Barrick Gold and Newmont Goldcorp.