Three Reasons Gold’s Long-Term Picture is Bright
The comments below are an edited and abridged synopsis of an article by Andrey Dashkov
Right now, there are powerful factors working for gold, and they have nothing to do with who’s president.
The Covid-19 crisis isn’t slowing down, and the US is spending a lot on dealing with it—about $4 trillion, as of October 2020. And that number is expected to grow.
The US budget deficit is in terrible shape as a result—the first trend giving gold a boost. In 2020, the deficit hit a record 16% of America’s GDP, the most in over 50 years. Despite this, the Fed has committed to more money printing.
With trillions more dollars in circulation, the greenback will continue to lose value against other currencies. That will make gold more attractive, as more people turn to it as a safe-haven store of value.
Another major trend driving gold higher is declining real interest rates. During the Covid crisis, economies have been lowering interest rates as a form of stimulus. Central banks have been encouraging people to borrow and spend.
But when interest rates are already low, the only way to lower them further is to go below zero, and in the US, real interest rates are already negative. This means you’re essentially paying a debtor to borrow your money.
So bonds, for example, don’t produce any income for their investors. Just the opposite: Their negative yield means that an investor who buys those bonds today will get less money than they invested when the bond matures.
In this case, gold is attractive. It doesn’t pay interest, but at least you’re not guaranteed to lose money. As those looking for a safe-haven investment turn to gold in favour of bonds, that’ll be good for the gold price.
And gold tends to move opposite real interest rates. In other words, as real interest rates drop, the price of gold rises.
Real interest rates are currently about as low as they were in 2012, and likely headed lower. The US economy is in a state of crisis. It won’t be able to support high interest rates. We could soon see gold hit $2,200 or more as real interest rates drop further. All of this volatility and economic uncertainty are good for gold.
There will be more temporary slips in gold’s price in the weeks ahead, but its long-term bull market is still intact. And as the pandemic continues hammering the US economy, a weakening dollar and low interest rates will boost gold’s price even higher.