…The level of M2 – the total amount of money in circulation in the country – is not only helpful in deciphering the fair value for gold but also where the metal is headed by forecasting how the money stock will trend and…while gold doesn’t move in lockstep with M2, it does follow M2 higher over time.
…Currently, gold is in a bull market but remains below fair value despite its substantial gain over the last year…[because] the metal became extremely oversold in the late stages of the previous bear market [and that] combined with the near-vertical move in M2 over the past 6-7 months has gold still trying to catch up.
Gold would need to increase to ~$2,400 to get back in line with M2 and, if history is any guide (using the 1980 and 2011 peaks as examples), the money supply is quickly heading to levels that would support a $3,000 gold price well in excess of fair value by the time this bull market is exhausted…
…There is an even bigger catalyst for M2 growth over the medium and long term…and that is the extent of the growth of the U.S. budget deficit.
…The U.S. will continue to fund…deficits with more debt and debt monetization. This will result in the rate of M2 growth remaining far higher than historical norms for at least the next several years, driving up the gold price to that $3,000 level.
Complicating matters even more is that future deficits are based on the assumption that interest rates will remain low, and the government will be paying well below average interest over the next 5-10 years compared to the previous 30-year average. While the Fed has changed its monetary policy stance and is allowing inflation to exceed target growth rates (as average inflation targeting will be used going forward), eventually, the Fed will have to act as the inflation lag ceases. Rate normalization will drive up the deficit at a much quicker pace, as net interest on the debt would become a far greater percentage of GDP. Using the 2041-2050 time frame compared to 2010-2019, net interest (top blue bar on the left column of each period) as a percentage of GDP of total outlays would be significantly higher over the coming decades. This is because debt will expand, and interest on that debt will increase to more normal levels (~4%). If nominal rates exceed projections over the next decade, there will be an acceleration of this timeline. In other words, I feel that 2021-2030 will look more like the 2041-2050 projections when it’s all said and done.
Everything is in place for gold to reach $3,000 per ounce. I’m not predicting that will occur within the next few months. In fact, I believe that gold could still correct further between now and the end of the year. It’s possible that the metal will drop another $150 per ounce and retest its 200-day moving average before reversing higher. There are many short-term headwinds over the next several weeks (e.g., slower money supply growth, uncertainty with the upcoming U.S. election, stabilization in the USD), but I believe, over the next 2-3 years, gold will hit that $3,000 target.
…I firmly believe that a diversified basket of quality gold mining stocks is one of the best ways to participate in the gold run to $3,000. I prefer to focus on the small and mid-cap producers, as that’s the sweet spot of the market with the most attractive risk/reward…
Editor’s Note: The original article by SomaBull has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. 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. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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