With negative interest rates in Europe and Japan, exploding debt levels, and the growing popularity of radical monetary experiments like Modern Monetary Theory in the U.S., traditional safe-haven assets like gold are looking more and more attractive, says Ron Stoeferle, co-author of the In Gold We Trust report.
We're looking at a perfect storm of long-term bullish signals, Stoeferle said in a recent interview with FS Insider (see Ron Stoeferle Discusses Gold, De-dollarization and Return of Large-Scale Monetary Experiments). The key signal will be when gold breaks above major resistance around $1,400 an ounce, which is where it's remained capped since 2013.
Last Year's Monetary U-Turn
The 2018 Q4 correction was the worst December since 1931 and provided an important revelation about central bankers and gold’s future trajectory.
We have experienced 10 years of extreme dovishness, Stoeferle noted, and of excess liquidity created by central banks to the tune of more than $18 trillion.
Late last year, the Federal Reserve was attempting quantitative tightening and implied many more rate hikes to go. This led the stock market in a panic with the U.S. central bank forced to retreat on their comments.
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Now, the expectation is that we will see lower rates going forward. The Fed also backed down on quantitative tightening. In fact, the Fed will become a net buyer of U.S. Treasuries again, Stoeferle stated.
“The market is addicted to this punchbowl of cheap liquidity and central bank stimulation,” Stoeferle said. “We clearly saw in the fourth quarter last year that markets really didn’t appreciate that. What we said turned out to be true, because we have seen this monetary U-turn. … I have no doubt that this is also going to be positive for gold.”
Fed Caught in an Interest-Rate Trap
Stoeferle noted that U.S. government debt has more than doubled in the past decade and will continue to expand in the years ahead.
"One thing is certain in our opinion: In view of existing debt levels, we are unlikely to see strongly rising or clearly positive real interest rates in the coming years. Central banks are caught in the interest-rate trap." (Source)
The 2018 fourth quarter was a warning shot, Stoeferle stated, and gold performed very well in that period.
Stoeferle expects that, going forward, the main driver in gold will be investor demand. If gold finally breaks out above resistance, we can easily see it head to $1,450 or $1,500 very quickly, at which point, institutional demand will kick in.
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