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Gold is trading at its highest level in more than 5 years and is likely on the verge of a major break out that should elevate prices of the yellow metal much higher. Here’s why. (478 words)
1. Expanding Money Supply Bullish for Gold
- …The gold price closely mimics the monetary base of the U.S. (since the U.S. took the world’s monetary system off the gold standard, gold has appreciated by roughly 3,750%, while the monetary base has increased by about 4,000% in that time – [a 94% positive correlation])…and the Fed appears to be on the verge of embarking on another easing cycle, so the price of gold should go up.
- Furthermore, while the monetary base has been contracted over the past 10 years…[it] is more than 300% higher than 2008’s levels while gold, on the other hand, is only up by about 90% over the same time frame…so it looks like gold has some catching up to do relative to historical standards.
2. Lower Dollar Bullish for Gold
- …As the Fed eases, the dollar is likely to head lower.
- …A lower dollar makes gold appear more attractive and cheaper in alternative currencies, a phenomenon that should add to the overall demand story for gold going forward.
3. Lower Interest Rates Bullish for Gold
- …We could see much lower bond and treasury rates going forward, and if the Fed follows the footsteps of the ECB and the BOJ, we could potentially see some treasuries go negative…as negative yields on government treasuries would incentivize investors to pick risk assets over bonds and cash.
- Given that stocks are relatively expensive, and that cash and bonds may yield negative inflation adjusted returns, gold could see a great deal of demand going forward.
4. Gold-to-Silver Ratio: At An Extreme Level
- The gold-to-silver ratio is around 90, the highest it has been in at least 2 decades. This could mean that the ratio could break out and go even higher from here if gold continues to appreciate more rapidly than silver going forward.
- …Every time the ratio has gotten close to being this skewed in the past it has led to a stellar rally in gold and silver. Typically, gold outperforms in the opening stages of a major bull market run, and then silver starts to outperform gold during the mid to later stages of a metals bull run cycle.
The Bottom Line
Given that stocks are relatively expensive, and that cash and bonds may yield negative inflation adjusted returns, gold could see a great deal of demand going forward. Gold is likely on the verge of a significant break out, and the absence of substantial resistance levels could enable the price to melt-up rapidly from here.
Conclusion
Ultimately, gold is likely to go much higher over the next several years and this is still a very good time to accumulate gold, silver, gold miners, and other gold related assets, as we are still very early in this bull market cycle.
Editor’s Note: The above excerpts (478 words) from the original article (1587 words) by Victor Dergunov have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Dergunov is receiving compensation from Seeking Alpha for pageviews of his original article as posted there so please refer to it for the unedited version. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement. You are encouraged to sign up in the top right hand corner of this page and receive our FREE bi-weekly newsletter (see sample here)