And the Winner of the US Election Is…Gold

And the Winner of the US Election Is…Gold

There are a number of factors that affect the US dollar price of gold.

At any point in time, some factors may be pushing the price higher while others are pushing the price lower. The result can be muddled or just a sideways movement.

On other occasions, the factors may align so that they’re all pointing higher or lower. In those cases, the result is a predictable drawdown or rally, depending on the unified direction.

The key to forecasting gold prices is to identify the factors and understand the direction they are pointing.

My long-term forecast for gold prices of US$15,000 per ounce or higher still prevails. This will happen in stages between now and 2025 with some volatility and drawdowns along the way.

That’s not a reason to delay buying gold. If you wait until 2024 in anticipation of a price target for 2025, you’ll miss most of the gains. And what you do realise in profits will represent progressively smaller percentage gains.

That’s just a matter of simple math. If the gold price moves from US$3,000 to US$4,000 per ounce, that’s a 33% gain. If the gold price moves from US$14,000 to US$15,000 per ounce, that’s a 7.1% gain.

In both cases you made US$1,000 per ounce, but percentage gains get smaller as the price goes higher.

The way to win big is to catch the move at the early stages. That way you end up with the same price per ounce, but it takes a far smaller initial investment to get there. That’s the smart risk-adjusted way to play a gold rally.

Still, investors want to know what gold is doing in the short run, even if they have confidence that it’s a good long-run play. That’s where our factor analysis comes in.

Understand supply and demand

Right now is one of those occasions where all factors are pointing up. Gold is set to rally between now and the end of the year.

Let’s look at the three leading individual factors pointing to a rally in gold:

The first factor is fundamental supply and demand. The global supply of gold from new mining output has been nearly constant at around 3,200 metric tonnes per year for the past five years.

The current bull market in gold prices began on 16 December 2015, when gold bottomed at $1,050 per ounce after the 2011–15 bear market. Gold mines cannot open overnight, but five years is long enough for new production to expand to benefit from rising prices.

That has not happened in part because new exploration has mostly produced low-grade ore where gold density is 0.4 grams per tonne or less. Production will actually drop in 2020 because of pandemic-related shutdowns and supply chain delays.

Meanwhile, demand from central banks, institutions and individual investors continues to expand. Buyers are not limited to new output but can buy from existing above-ground stocks. The problem is that gold ownership has migrated to the ‘strong hands’ who want to hold for future appreciation and are not inclined to sell. This combination of weak output, strong hands and rising demand is a recipe for higher prices.

Declining confidence in paper money

The second factor is declining confidence in paper money. The Federal Reserve has printed almost $4 trillion of new money in the past six months and the US Congress has approved $3 trillion of added deficit spending (with more likely on the way). Central banks and parliaments around the world have done likewise.

This printing and spending spree has not produced immediate inflation because inflationary expectations have been muted due to the pandemic and the economic depression. Investors have expressed a preference for savings over consumption and money velocity has continued its 22-year decline.

Still, this liquidity preference is temporary. Individuals are looking ahead and can see that inflation is the only way out of excessive debt. The move toward gold is simultaneously a vote of no confidence in paper money and a hedge against future inflation. This trend will continue.

The last two gold bull markets have clues

The third factor is a technical analysis based on the last two gold bull markets. The first great bull market (1971–1980) produced gains of 2,100% in nine years. The second great bull market (1999–2011) produced gains of 670% in 12 years. The third great bull market began in 2015 and is still underway.

Gains so far in the new bull market have been about 100% in five years. A simple average of the first two bull markets would produce expected gains of 1,400% in 10 and-a-half years.

Starting from a base of US$1,050 per ounce, if the new bull market tracks the average to the prior two, we should expect to see gold prices at US$14,700 per ounce in early 2026.

In fact, the rally is not constrained by the average and could easily exceed the record bull market of the 1970s.

Regardless of the candidate, gold wins

In addition to these three long-term factors, numerous other short-term factors will come into play in the next month that will amplify the effect of the long-term factors described above.

Among these is the impact of the US presidential election on 3 November next week. Regardless of which candidate wins, gold will also win.

If Trump wins, it’s reasonable to expect additional deficit spending along the lines we have already seen.

The Fed will have to monetise this debt to keep interest rates from rising. That debt monetisation will increase inflationary expectations, which drives the dollar price of gold higher. A Trump victory may also produce more Antifa-style violence in reaction, which increases the safe haven appeal of gold.

If Biden wins, not only will there be more stimulus-style spending, but there will be enormous pressure to enact the Democratic Party platform that includes guaranteed basic income, free healthcare, free tuition, free childcare, open borders and the Green New Deal.

These programs will cost tens of trillions of dollars that will also be funded with huge deficits and debt monetisation by the Fed. The inflation signal will be even stronger under Biden than Trump and gold prices will rise predictably.

Finally, a disputed outcome in which the Electoral College is a 269-269 tie, or in which results are not final because of disputes over mail-in ballots, will certainly spark a rally in gold as a safe haven in tumultuous times.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia

PS: We’ve been tracking the US election closely. It might be hogging the headlines, but does it matter for Australians? Check out our most recent interview over at The Daily Reckoning Australia YouTube channel to see what our experts have to say.