The price of gold hit a new all-time high on Monday at $ 1,945 an ounce. This move should come as no surprise to anyone paying attention to the current financial landscape. The Federal Reserve has injected an unprecedented amount of new money / debt into the economy since March in an effort to prevent a collapse from the impact of the Covid-19 virus and subsequent restrictions on global business activity. More than $ 6 trillion in stimulus so far is roughly double the total amount injected during the 2008/09 financial crisis. And they are just beginning.
The Federal Reserve has stated that the stimulus efforts will last for years and is committed to doing “whatever it takes” to keep the economy afloat. The balance of the Federal Reserve shot up from $ 4 trillion before the crisis to $ 7 trillion today. This is the highest level recorded by a wide margin and the fastest that has risen. And this is before the second round of stimulus, which is currently being negotiated. While there are plenty of bulls bullish amid a global dollar shortage, they have so far been incorrect in their bullish outlook. The dollar index fell from a high of 103 on March 20th at just 94, a significant drop in just a few months to the lowest level since September 2018.
It turns out that when the money printer turns brrrrrr, it is actually bearish on the dollar and bullish on gold, which has now risen 25% so far this year. This compares to a 0.5% loss for the S&P 500 and even beats the red-hot NASDAQ gains, which were up 15% over the same time period. While we advocate having some physical gold, mining stocks have generated the best gains in 2020. The VanEck Vectors Gold Miners ETF (NYSEARCA: GDX) It has increased 42% so far this year and many of the junior miners we have in the Gold Stock Bull portfolio have increased 100%. Miners see their profit margins increase at a faster rate than the price of gold, which often results in leveraged earnings.
The recent break above resistance at $ 1,800 (red circle in the chart) was very significant for gold and was followed by a rapid recovery of an additional $ 150 towards $ 1,950 per ounce. And, in our opinion, there is much to the upside in this rally, with the price still below the midpoint of the trend channel. If we use the last major bullish cycle in gold as a guide, we forecast the price to rise to $ 6,000 by the beginning of 2026. This would represent another 10-year cycle and a 6x move from the December 2015 bottom around $ 1,050.
Gold price targets
We have added price targets for the beginning of each year that are in the middle of the trend channel. This analysis gives us the following average price points for the coming years:
- January 2021: $ 2,250
- January 2023: $ 3,200
- January 2025: $ 4,600
- January 2026: $ 5,600
These are only the midpoints and not the highs for each year. At the top of the trend channel, we get the following price forecasts:
- January 2021: $ 2,700
- January 2023: $ 4,000
- January 2025: $ 5,750
- January 2026: $ 7,000
This gives us an idea of where we might expect the gold price to peak in the coming years and the magnitude of the gains that we expect.
If the 250% advance to a maximum potential of around $ 7,000 sounds exciting to you, consider that quality mining stocks will generally offer around 3 times leverage during these periods, suggesting the possibility of 750% gains in the next 5.5 years. Of course, there are all kinds of variables that could affect the trajectory of the gold price, but this gives us a rough idea of the future potential. On the downside, I suppose the government could show fiscal restraint and the Fed could raise interest rates and lower its balance sheet. Perhaps the annual deficit could be reduced and the debt-to-GDP ratio could fall as the United States switches to a surplus and pays off debt. But yeah, those odds are incredibly slim.
On the other side of the spectrum, we could be conservative in our estimates of how much new money will be created and how low interest rates could go in an effort to avoid a stock market crash and the accompanying political consequences. A steady rise in inflation could give way to rapid inflationary pressure or even hyperinflation in the coming years. If the dollar loses its world reserve status and people lose faith in governments and central bank fiat money, the upward price we mentioned (denominated in dollars) could end up being very conservative. In that case, we would like to start measuring the value of gold based on a basket of other scarce assets / products, rather than a fractional reserve of fiat money.
In any case, we believe that gold and gold miners are currently highly undervalued and we expect the price to rise rapidly in the coming years. Metals and miners prices could drop if the stock market has another major correction to March levels or lower, but we believe the gold slide will be shorter and shallower than most expect. As with past stock market declines, there is generally only a short window when leveraged lenders and weak speculators are forced to hedge or panic outside of positions. This is normally followed by the flow of capital into the sector, in part due to the inevitable response from governments and central banks to further degrade their currencies in an attempt to stimulate growth. Therefore, we believe that it makes sense to stay central for a long time and keep some cash on the sidelines to take advantage of such declines.
Original publication
Editor’s Note: The summary bullets for this article were chosen by the editors of Seeking Alpha.
