At long last

For more than two years it appears at long last the major “correction” in gold prices is just about over. 

For many reasons gold should be in the early stages of a major upswing.

It is worth noting that as far back as the year 2011 gold reached a price of just about $1,900 an ounce, and the subsequent decline of nearly 50 per cent over the succeeding interim has had the effect of shaking out all but the most zealous of gold enthusiasts.

What happened was the decline in inflation, which pushed up the price of gold that had risen as an inflation hedge. Also we entered a period of economic stagnation.

Furthermore, gold is priced in U.S. dollars and that currency has soared in recent years, so it took fewer dollars to buy gold. Given a reversal of these trends an investor must determine what is the best investment course to follow.  Slow economic growth is another factor that must be considered.

In the last few months the U.S. central bank, the Federal Reserve System, started to raise interest rates.  Before, when the economy was so sluggish, higher interest rates would have entailed trouble. To stimulate the economy the Feds printed money at a very rapid rate. That eventually would show up in inflation. As the economy picks up, prices increase, so will inflation and the recent actions of the Feds confirms concerns.

As inflation shows up decisively the public notices that the inflationary period thus reduces the buying power of the currency. It usually takes about 18 months for inflation to appear but it soon will become obvious.

Bonds of course weaken in this economic scenario and common shares become less attractive. As the central bank raises interest rates, the cost of owning shares climbs. Under this course of events, common shares are inhibited by rising interest rates, rates than weaken economic activity, and the beneficiary of this is gold.

The weak performance of gold in the last few years has disenchanted enthusiasts. That has weeded out the weaker gold holders. Too, some suggest that physical cash is disappearing for transactions. Also, the problems in Europe continue, a longer-term concern.

As strengthening gold prices persist, that will attract more interest in that metal. Then eventually even the most die-hard anti-gold commentators will revise their attitudes. 

Hence, all the evidence points to much higher gold prices ahead.



Bruce Whitestone