Recently, gold has taken a hit from profit-taking.
Investors have been switching out of that sector because of rising evidence about the economic outlook.
Yet, the fundamentals for gold remain intact. Clearly, the reasons for gold’s rise still are in place, so that drop in gold’s price is nothing more than a blip. Furthermore, few appreciate the magnitude of the rise in the price of gold that already has taken place.
There follows a comparison of the climb in gold prices relative to the U.S. Dow Jones Industrial Index. That begins with the year 1973, when the United States ended the convertibility of its currency into gold.
From 1973 to the present, gold rose 35.4 times; the stock market, 11.2 times. From 1998 to now, gold climbed 63.5%; the market 31. 9%. From 1999 to 2011, gold advanced 29.9%; the stock market 11.0%.
When the North American economy eventually recovers, it is likely to be accompanied with a great deal of inflation. Witness the rising tide of inflation beginning in 1933.
The U.S. dollar will weaken, reflecting the trillions of dollars that the U.S. has thrown into the economy, simply by printing money. With that so-called quantitative easing, the Federal Reserve is buying bonds, again with printed money. Without doubt those moves will weaken the U.S. currency. Gold and most commodities are negatively correlated with the U.S. dollar, so as that falls, gold and other commodities will rise in price.
Moreover, given the sluggish economy and falling house prices, the overly indebted consumer will be unable to do much to spur business activity.
Hence, policy makers will be encouraged to maintain high government spending, huge budget deficits, and a loose monetary policy, that is low interest rates.
In addition to those negative domestic factors, it should be noted that production from developing economies will be coming on stream, adding further pressure on the U.S. economy.
For example, China can produce automobiles at a fraction of the North American price.
Concerns that moves to date have been insufficient to invigorate the economy suggest that further, innovative measures will be introduced as the Federal Reserve plainly “pays” for that by printing more money. Certainly, that constitutes a very bullish background for gold.
So, one has to be patient. Gold has come a long way, but there is no end in sight of the upward trend. The above-mentioned factors led central banks to stop selling gold out of their reserves, but instead to buy gold to diversify their U.S. dollar holdings.
Until there is a major shift in policies, the evidence is overwhelming that gold’s price will move ever higher.
