Editorials

How high will gold go in this bull cycle?

Many technical analysts look at a twenty year chart of gold during the current bull market in gold, and project gold to make a new high, exceeding the $1,917 high of August 2011.


Gold merely hitting a new high, above the $1,917 in 2011, is a superficial analysis. Technical analysis and high-frequency algorithmic trading can be effective in short term trading, but are not well suited for making long term predictions  This is why hedge funds and mega wall street banks tend to blow up during major crashes.  Algorithmic trading programs can create flash crashes and tend to make markets more volatile.

An excellent gold standard of gold studies is the annual report "In Gold we trust"  produced by an investment firm Incrementum AG based in Liechtenstein. This is a report which combines technical and fundamentalist analysis of gold prices. In the US about 70% of trading is generated through algorithmic trading with proprietary programed robots trading without regard to fundamentals. Large profits can be made with leverage on small swings.  One problem is they tend to blow up during black swan or unexpected events. 

Fundamentalists are often poor day traders, but are better at understanding the long term trends and the relationship between the price of gold and soft money policies of governments and central banks. While many analysts are bullish on gold after the Federal Reserve announced its open-ended quantitative easing programs, a more significant factor is the projected rise in debt as a percentage of GDP. With an anticipated $3.8 trillion U.S. deficit in 2020  and a $2.1 trillion dollar deficit in 2021, the national debt will increase by $5.9 trillion in the next twenty four months.

The Federal Reserve is not doing finite amounts of quantitative easing like it did with QE1. This time, it is going to an almost infinite amount of quantitative easing. QE1 was $2.3 trillion.  QE4 is $6 trillion and counting. Goldman Sachs believes the growing amount of debt the Treasury must issue to finance the U.S. deficit's will require the Fed to increase QE4 to fund the coming tsunami of new debt that will be issued by the Treasury. 

The current QE required to fund current deficits will be added to the existing Fed balance sheet, which had a starting place of $4.52 trillion in 2016.  The Fed balance sheet is expected to exceed $10 by the end of 2020. Once the economy begins to recover and velocity picks up, the expansion of the monetary base will transmit into devaluation of the dollar, inflation and the rise in the price of gold. Actually gold is money, and fiat money is inevitably devalued by sovereigns. 

B of A sees gold hitting $3,000 an ounce in the next 18 months. Incrementum AG in their "In Gold We Trust" report, sees gold conservatively hitting $4,800 in U.S. dollars by the end of 2030, based upon an accumulation of deficits, and soft monetary policy or "modern monetary theory" developed by the Polish Neo-Marxist economists, Michael Kalecki (1899-1970), who believed deficits do not matter. Modern Monetary Theory has been picked up by left wing politicians such as Congresswoman  Alexandria Ocasio-Cortez and Secretary of Treasury Steve Mnuchin.  It must be remembered gold at $1,900 in 2011 was almost 10 years ago. According to Shadowstats.com, true inflation has been averaging 4% since 2011. In todays dollars gold would need to reach $3,000 to beat the previous high in 2011.

If gold goes to three thousand, gold coins and large gold miners like Barrick and Newmont should double.  However, quality junior minors like Gold Resources Corp (GORO) are projected to increase by ten times, because they are more levered. Gold futures are levered,  but margin calls can create investor wash outs during volatility created by short term noise. 
 

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