After having gone up 12 years in a row, many investors are asking if the gold bull market is over. Though the gold price is at $1550 today, the fundamentals driving the gold price higher still remain. In particular, the world’s central banks are devaluing their currencies simultaneously in an effort to boost exports and stimulate their economies.
Global Monetary Easing
Following the collapse of real estate markets in 2008, Western central banks have attempted to reinflate asset prices to encourage consumer spending and growth. They have done this by printing massive amounts of money to purchase bonds, thereby keeping interest rates artificially low. A byproduct of all of this monetary easing is currency devaluation, since, all other things equal, an expanded money supply devalues the currency. As a result, commodities, such as precious metals, fuel and food, have risen sharply in price over the last few years.
Though some have argued that the Federal Reserve and other central banks will eventually taper off the monetary easing, bringing about the end to the gold bull market, the monetary easing is unlikely to end for the foreseeable future because without it the markets would collapse to more natural levels. In essence, the central banks are fighting a natural deflationary correction to overbought markets.
Potential Catalysts for Higher Gold Prices Supporting Gold Bull Market
There are several catalysts that can cause the gold price to head much higher than it is today, such as rising inflation, accelerating gold repatriation and bank holidays. Since the supply of gold increases modestly each year from mining activity, at about 1.5 percent, gold is a hedge to inflation, since it cannot be inflated in the manner that paper or electronic currency can. Therefore, increased inflation or even hyperinflation, which is extreme currency devaluation in a short period of time, will cause gold prices to move higher in relation to the currency.
Recently, Germany has demanded the repatriation of 300 tons of gold from the United States and 374 tons of gold from France. This gold was stored abroad during the Cold War to protect it from the neighboring Soviet empire. As a consequence to the German request for their gold, other nations are now beginning to contemplate repatriating their gold. However, it is believed by some industry experts, such as Bill Murphy, chairman of the Gold Anti-Trust Action Committee, and James Turk, founder of GoldMoney.com, that gold held by Western central banks on behalf of other nations has been improperly leased or sold. If so, if enough nations are to request to repatriate their gold simultaneously, there could be competing claims over a limited supply of gold, thereby demonstrating a massive gold shortage. As a result of such a shortage, the gold price may be propelled to multiples of where it is today.
Bank holidays, such as the recent one in Cyprus, could also increase demand for gold as a safe haven asset. Increasingly, government officials in Europe and elsewhere are considering confiscation of bank deposits to rescue insolvent banks. Though the confiscation of deposits over 100,000 euros in Cyprus may not set a wider precedent, investors are rightly concerned that politicians will be tempted to loot bank accounts in future crises. As a result, investors increasingly will put their money into gold, since it can be kept outside of the financial system, and thus provides immunity to banking failures.
Though some believe the gold bull market is over following the market consolidation over the last two years, the fundamentals for higher gold prices remain, with potential catalysts that can send the gold price much higher. Given the systemic risks to the financial markets from unprecedented levels of money-printing by central banks, investors should allocate a portion of their portfolios into gold to protect themselves from crises in increasingly unstable markets.