Why the Gold Price Is Headed for New Heights

by Apr 15, 2021Investment Strategy, Market Insights

The gold price is headed for new heights amid money printing and low rates.

When COVID-19 was declared a pandemic and countries across the world went into lockdown, investors sought out the safety that precious metals offer as a safe-haven asset against market disruptions. The government reactions to COVID affected the markets and our behavior in a similar way to a World War, and so, as predictably as with any economic shock, the price of gold soared, reaching it’s all-time high in August 2020. 

Then, with the roll-out of vaccines, monetary and fiscal stimuli on a level never seen before, and the easing of restrictions, the prices of metals have since eased down. So the question remains: Where is the gold price headed as global economies continue to recover and the pandemic moves closer to an end?

What will be the price of gold?

According to Kevin Rich, global gold market advisor for the Perth Mint, gold will rise again when equity markets soften and volatility increases. Here are a few ways that could happen:

The Fed starts pulling back its support

Once the Fed sees the pandemic starting to fade, they will likely start weaning us off the support many Americans and businesses have grown accustomed to. In other words, they’ll put a brake on money printing, decrease their Treasury purchases, and, dare I say it, even increase interest rates as a response to the rising inflation.

The stock market in particular has benefited greatly from Washington’s loose monetary and fiscal policies. Easy access to debt, capital infusions, and investor appetite have pushed stocks higher, inflating the biggest stock market bubble in history. Just look at the chart below showing the Buffett Indicator, which is used as a measure of how stocks are valued compared to GDP. According to the indicator, stocks have never been more overvalued than today, dwarfing both the tech bubble and the housing bubble.

The Buffett Indicator is at an all-time high, which means the stock market is overvalued and you should consider gold as an investment.

Once there are signs that the government will tighten its monetary policies, the overconfidence in stocks will dissipate — and once the stock market notices that, a sell-off could ensue that could pop the gigantic bubble. That will be the beginning of a big rise in the gold price as investors will run away from crashing stocks to the safety of the precious metal.

Inflation continues to rise

Another consequence of near-zero interest rates and trillions of dollars being printed is inflation risk. We haven’t seen significant inflation since the 1970s, but back then it led to skyrocketing interest rates, and during inflation stocks typically don’t perform well, as we discussed here.

We’re already starting to see inflation numbers that we haven’t seen in 40 years. For instance, housing prices are rising at the fastest rate in 15 years, and there are small housing bubbles popping up in parts of the market. I’m sure I don’t need to remind you about what happened to the markets and our economy the last time a housing bubble popped…

The dollar loses more of its purchasing power

The massive stimuli pumped into the economy over the past 12 months increased the money supply substantially. That erodes not only the confidence in the dollar but also its purchasing power, which is already on a decades-long downwards trajectory.

The purchasing power of the US dollar has declined rapidly over the past 100 years.

When the dollar loses its purchasing power, so do dollar-denominated assets such as stocks and bonds, and if your portfolio consists entirely of such assets, your wealth therefore loses its purchasing power too.

Any one of these events will push investors towards the safety of gold. Should two or more events happen at the same time, investors are going to rush towards gold as an investment.

The obvious result? Soaring gold prices.

Gold has room to grow

Not only is physical gold the best asset to hedge against the next crisis, it is also one of the very few assets, along with silver, that aren’t at an all-time high. This means that gold has lots of room to grow whereas other asset classes, including stocks, are already at their peak.

As an investor dealing with your life savings, you should be aware that this is a calculated risk. Crises happen, always, and usually once per decade. Every investor should be prepared for when the next crisis happens. And being prepared means having a truly diversified portfolio, which includes gold. 

Some investors like the equation that the Fed’s money printing equals rising gold prices, and they will place a larger portion of their savings into gold. Others will just look at gold as a hedge, a fail-safe against a catastrophe in the markets or in geopolitics or even against a natural disaster, so they will allocate a smaller portion of their portfolio to gold. 

So, if you haven’t already secured your financial future, now is the time to consider gold as an investment because if you’re waiting until the next crisis arrives, it’ll be like buying insurance coverage while your home is on fire — it’s possible, but it will be extremely costly.