Gold prices hit fresh record highs twice in April; IMF cautions recession worse than 1930

Despite gold’s stellar performance, the precious metal is still very likely in the early stages of this remarkable bull market cycle.

  • By Jigar Trivedi

Gold is up substantially over the last year, but we’re still very likely in the early stages of this bull run. The Fed is expanding the monetary base, a very constructive development for gold. The U.S.’s incredible debt burden is also a favorable catalyst. Low-interest rates and amplified inflation are also constructive factors for gold. We expect substantially higher gold prices going forward.

Gold has performed quite well in recent years. In fact, the yellow metal is up by around 35% over the past year alone (24% in 2019 & 12.5% in the 2020 year till date), while the S&P 500 and other major averages are down by around 15% or more since their all-time highs were reached earlier in the year.

However, despite gold’s stellar performance, the precious metal is still very likely in the early stages of this remarkable bull market cycle. Unprecedented monetary expansion, immense debt, amplified inflation, extremely low-interest rates, and other constructive factors are likely to send gold prices substantially higher over the next 2-3 years.

Fed’s Unprecedented Stimulus

The Federal Reserve is in the process of creating an unprecedented amount of new money to deal with the fallout from the coronavirus epidemic. The Fed has announced several multi-trillion-dollar monetary programs designed to provide massive liquidity to markets to prevent the economy from collapsing. Coupled with Fed stimulus, the Government is coming out with bailout programs to inject capital into various segments of the U.S. economy as well.

There is only one problem: the U.S. government doesn’t have any money. So all these trillions are coming from the Fed. The Fed can simply digitize all the dollars it needs to buy Treasuries, corporate bonds, junk bonds, or just about any other kind of debt it wants to inject immense capital into the financial system.

The problem is that this kind of monetary policy is bound to significantly dilute the U.S.’s monetary base. We can already see that the monetary base has increased to around $3.9 trillion and is floating about on par with prior all-time highs. However, the Fed’s printing presses are just getting started, and the eventual post-CV monetary base could be around $10 trillion or more.

We know that the monetary expansion is just getting started, and while the monetary base is at around $3.9 trillion today, it is likely to climb substantially higher as the Fed continues to monetize debt and inject liquidity into various areas of the market. Currently, the monetary base is at around $3.9 trillion, but a couple of years down the line it could be at $10 trillion, or possibly higher even.

This monetary expansion likely means substantial higher prices for gold going forward as well.

The Bottom Line: This is an Ideal Environment for Gold

Gold has been a great store of value and a way to diversify the portfolio throughout time. Given current government interventions, I think it is prudent to keep some gold in the portfolio. Whether that is physical gold, trusts, ETFs, gold miners, or royalty companies will be much more dependent on individual preferences.

A gold centred portfolio can by itself have even higher volatility than the stock market. It is also worth highlighting that gold mining equities can have extreme volatility and be very correlated to the overall stock market in the short term, as was seen during the month of March this year, but is often a good hedge over time.

(Jigar Trivedi is Fundamental Research Analyst – Commodities at Anand Rathi Shares and Stock Brokers. Views expressed are the author’s own)

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