Stocks, commodities, and gold are having a good start to the year. However, with a pickup in inflation and the dollar’s recent woes, gold may start to take the lead.
This time on Financial Sense, we spoke with Frank Holmes from U.S. Global Investors about his take on gold and where he thinks the markets are headed.
Commodities on the Upswing
All of these factors help gold, Holmes stated, and all of the commodities did well last year.
These forces also drive exports. We’re seeing that global PMIs started turning positive back in June, and it’s always a good precursor.
PMIs are good indicators that are correlated to copper, iron ore and oil demand.
“Whenever you get rising oil and copper, there's a growth factor there for GDP-per-capita that shows back up in gold,” Holmes said.
When it comes to inflation's impact on gold, we first have to look at what goes into the consumer price index, Holmes stated.
By the 1990 definition of CPI, inflation was running at 8-9%. In contrast, a 10-year bond was yielding 2.7%, leaving investors with a negative rate of return.
In that scenario, gold always rallies, Holmes stated. The Fed’s redefinition of CPI is understating inflation, he added, and with regulations coming off, we should expect this to add more fuel to gold’s fire.
“There’s something else going on in addition to the dollar being weaker,” Holmes said. “We have a change of thought process [in Washington] … any deregulation or streamlining of regulations, or dropping of taxation is a huge boon to economic growth, and I think that’s going to show up also in inflation.”
Gold’s Direction is Up
Holmes thinks gold can go to $1,500, and that it’s a non-event for gold to run another 12 percent this year, he stated.
Inflation could be the sleeper factor, Holmes said.
We’ll have interest rates rise to 4 percent, and unless the federal government fast-tracks deregulation within this rising interest rate scenario, we will get a big economic slowdown. However, if we continue to streamline regulations in this last scenario, we’ll see economic prosperity.
“I believe, right now, we are in a negative interest rate environment,” Holmes said. “I think we’re going to have to live with negative interest rates.”
Regulation is the factor hampering gold right now.
“One has to really try to understand some of these other regulations and what they’re doing to the formation of capital,” Holmes said.
We’re likely at peak gold production, Holmes noted, with rising demand in China.
For gold stocks issuing paper, Holmes advises getting rid of them as soon as possible, because they will take down performance.
“You can see this big surge in gold prices, where there’s global demand, then you have the fear trade, which is inflation,” Holmes said. “I think you could have as an unexpected consequence a big move in the price of gold.”
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