06 June, 2023

What's Next for Gold?

Earlier this year, the price of gold breached $2,000 per ounce.

As of writing, the metal is trading below that level.

Mainstream media blames several factors on gold's relative underperformance over the past several trading sessions.

First, the debt ceiling debacle. As United States President Joe Biden and Speaker of the House Kevin McCarthy are about to get engaged in a negotiation about the national debt level, investors are fleeing to safety. And they choose cash at the expense of other assets, including gold.

Second, the regional banking crisis continues. And investors are still anxious about how exactly it will play out and what impact it will have on the rest of the financial system.

Finally, inflation remains high. Even though in April it declined compared to the previous month (4.9% vs. 5%, respectively), prices keep rising. This, too, makes investors nervous about the path the country's economy will take. Some fear a recession.

Mainstream financial media presents these arguments as reasons to stay away from gold.

In fact, you should do the opposite.

Here's why.

The Debt Ceiling Debate

In short, the debt ceiling debate is about spending and fiscal policy.

In January 2023, the total national debt of the United States and the debt ceiling both stood at $31.4 trillion.

If the total debt available to the US government was a credit card, it is now maxed out.

In our view, a deal will eventually be reached.

Because the other option is for the United States to default on some of its debt.

And that would be a disaster for both parties and the economy as a whole.

Brookings Institution ran a simulation of a potential default and found out that some or all these consequences would be possible:

  • An 80-basis-point increase in 10-year Treasury yields,
  • a 30 percent decline in stock prices,
  • a 10 percent drop in the value of the dollar, and
  • a hit to household and business confidence, with these effects waning over a two-year period.

Interest rates would soar, stocks and the US dollar would drop, and confidence in the US financial system will suffer.

What should investors do in this situation?

If interest rates go up, the price of bonds will decline.

Stocks will fall.

The US dollar would tank.

Gold is the only option here.

It exists separately from the financial system, it's nobody's obligation, and it tends to rise in value when the US dollar weakens.

The Regional Banking Crisis

The collapse of Silicon Valley Bank and First Republic dominated headlines in the US.

But the crisis itself is quite contained.

Unless we are missing something, there haven't been any signs of a massive spillover potential.

It's true that other banks may fail. But none of them is likely to trigger a global financial catastrophe.

(You don't want to be holding their shares when it happens, of course. But it's a different discussion.)

The banking crisis is overblown.

But what if it isn't?

Then investors should think about the best asset available to investors outside the traditional banking system.

And we're not talking about crypto, of course.

Gold is an essential asset that every investor should be exposed to.

Regardless of how the banking crisis unfolds, gold will stay outside of the banking system anyways.

Persistent Inflation Is Good for Gold

Gold has proven again that it is better at protecting investors against inflation than many other asset classes.

Prices started rising sharply in November 2021.

Since then, gold has been up 12%. The S&P 500 index has lost 10%.

Bitcoin is down 53% as of writing.

It's true that gold will not match inflation month-for-month. You should remember that it tends to work in the long term. And now that we have more than one year's worth of data, the evidence is here.

Gold outperformed both equities and bonds (which are down 11% since November 2021), as well as crypto, which earlier was presented as the "gold killer."

Well, not only did the yellow metal survive, but it also passed its "safe haven" test with flying colors.

In the future, we will expect more of the same.

Gold acting as a safe haven if the United States defaults on its debt...

Gold remaining the non-financial safe haven during the ongoing banking crisis…

Gold outperforming other assets during periods of high inflation.

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