More Room to Run for Gold?

August 15th, 2016 by

When an asset gains 25% to 30% over the course of seven months, it’s tempting to say that the bulls in the market are running out of steam.

This has frequently been said of gold this summer. Adding to this perception has been the range-bound and largely flat trading for the gold market since prices crossed back above $1,300/oz in late June.

Despite this pattern of trading sideways, there are still convincing fundamentals in place that could help gold gallop further over the course of 2016.

“Perfect Storm”

One of the experts who has made a compelling argument in favor of gold’s continued rise is Diego Parilla, who writes for the well-respected Financial Times. In a recent article, Parilla argues that the strong potential for gold to make a “multiyear bull run” is the result of central banks making their own bed with such a prolonged period of unorthodox policies that they cannot easily unwind from.

bank“Time will tell if central banks and governments will be able to engineer a smooth solution to the challenges ahead, or if the remedy will be worse than the disease,” Parilla eloquently explains.

He continues, “Monetary policy without limits will lead to a very wild and bumpy ride and a larger crisis than the one we have been trying to resolve: a perfect storm for gold.”

Supporting Views

There are a number of factors that have contributed to this “perfect storm” seen by Parilla. While central banks remain stuck in a position where they have little choice but to keep interest rates abnormally low for an extended period of time, traditional financial assets like stocks and bonds have sky-high valuations. Even the most novice analyst will tell you that it’s not advisable to “buy high” when assets are in a bubble or merely priced very high. For instance, the stock markets continue to eke out all-time highs in the U.S. while government bonds around the world have historically low yields (meaning bond prices are very high).

Bill Gross. Source: LA Times

One leading voice in this area is Bill Gross, the lead financial manager for Janus Capital and co-founder of Pacific Investment Management Company (PIMCO). Gross has been the biggest name in the bond market for decades. Even he is now extolling the benefits of tangible assets like gold amid these upside-down markets.

Gross has been very critical of negative interest rates, characterizing the current world economy as one that “devolves into Ponzi finance.”

One of the reasons that Gross has excelled in the bond market—earning him the nickname “Bond King”—is that he understands the nature of very large, liquid markets. These markets, like bonds, are big enough for the major players in finance to deploy their capital. For instance, the market for U.S. Treasurys is a staggering $19 trillion.

pile-of-gold-rallyWhen it comes to finding the right market to tap that isn’t at or near its all-time high, the only one that’s big enough is gold. Investor and entrepreneur Simon Black, known as “Sovereign Man,” makes this astute and prescient observation. The global gold market exceeds $7 trillion, according to the World Gold Council (WGC). Given the recommendation by Gross, Parilla, and others to start buying gold, this makes gold the ideal candidate for a future rally amid overcrowded bond and stock markets.

Black sees the possibility for gold to appreciate another 50% in the medium-term, given that it remains far from its high of $1,900/oz hit in 2011.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.