Gold set a new record over the weekend as prices topped $ 1,920 per ounce, the previous all-time high set in 2011, but the momentum may not stop until $ 4,000 per ounce is withdrawn, according to Frank Holmes, CEO of US Global Investors, who based his prediction on the effects that the monetary stimulus had on gold during the last recession.
It is important to take Holmes’s forecast in context.
Although gold has already exceeded all-time highs in several foreign currencies, this is the first time since 2011 that the yellow metal has seen new highs in terms of US dollars.
As of 7:00 amEST, spot gold is trading at $ 1,944 an ounce.
In 2011, gold did not consolidate around the peak and formed a plateau; rather, the metal retraced almost immediately, beginning a long-term downtrend that stirred in December 2015.
This pullback from the highs of nine years ago must also be taken in context; September 2011 had already been three years since the start of the last Great Recession, and gold was already in the final innings of a three-year bullish recovery that started in November 2008, at the start of the economic downturn.
Since 1979, there have been five recessions, including the current one that began in February 2020, as designated by the National Bureau of Economic Research (NBER).
It is important to note that gold did not recover during any of the previous four recessions, and only saw a bull market manifesto after the end of two recessive periods: 2001 and 2008-2009, as can be seen from the table below .
The table above shows the Federal Reserve fund rate (blue line), plotted alongside the gold price (orange line). From 1979 to 2008, the Fed’s gold and fund rate moved in tandem; As interest rates experienced a long-term secular decline from the late 1970s to the mid-2000s, gold also followed this downward trend. The decades-long bearish cycle in gold prices bottomed out in the early 2000s and steadily increased along with rising interest rates until 2007.
The first deviation between gold and interest rates occurred in 2008, when the onset of the recession sparked several rounds of quantitative easing, bringing interest rates to near zero, where rates held until they were raised in late 2015 .
During this period of modesty by the Federal Reserve, which lowered rates to a level never seen before, gold continued to rise until it peaked in 2011.
What distinguishes the 2000s from previous decades was the sharp rise in gold prices that followed the fall in interest rates, once in 2008, and more recently this year, when the COVID pandemic broke out- 19.
Many analysts attributed this unusual pattern to record levels of monetary stimulus.
“In the next three years, if we look back, if [history] It is repeated, from 2008, 2009 to 2011, that in three years gold went from $ 750 – $ 800 to $ 1,900. If we forecast that because we have the same Federal Reserve balance sheet expansion, then it would be projected, if the cycles are exactly the same, gold could hit $ 4,000, ”Holmes said in an interview.
He noted that while the Fed has already set records on the level of monetary stimulus injected into the economy, quantitative easing will not stop until the central bank’s balance sheet exceeds $ 10 trillion.
“This will cost the government of the United States approximately $ 10 trillion in fiscal and monetary policy to recover the economy, so I think that the number you are seeing after 2008, 2009 after the Lehman Bros. bankruptcy saw the balance it expanded from $ 1 trillion to $ 3 trillion. I think it has to reach $ 10 trillion overall, “he said.
Holmes is not alone in his long-term bullish forecast. Dan Oliver, founder of Myrmikan Capital, sees prices heading to $ 10,000 an ounce.
“The Fed, as you know, has been on a massive buying wave due to the virus situation, and therefore the equilibrium price of gold is increasing proportionally, so the figures now to balance that balance are enormously high. Oliver said in an interview. “Me [forecast for gold prices] has changed. Now I’m at $ 10,000. ”
Still, some analysts see prices overheating in the short term.
Rick Rule, president of Sprott US, said there is a possibility of a price correction before a more substantial recovery takes place.
“If you asked me my perspective on the price of gold within two or three years, I am optimistic to the point of being extremely optimistic,” Rule said in an interview. “If you were to ask me my perspective on the price of gold in the next two months, I suspect it could have gone too far, too quickly.”
Rule added that investors can expect a lot of volatility for gold in the coming months.
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