Gold prices to enter super cycle as US economy is about to sink under record debt?

The economy will remain sick in the medium term in the wake of the coronavirus epidemic, giving gold the wings. Put axiomatically, the worse it is for the economy, the better for gold.

Gold is emerging as the red hot strategic asset in the uncertain times overshadowed by the coronavirus pandemic. The precious metal has already made a 13 percent rise so far this year, but that's not all. Some analysts believe that gold, which is hovering over the $1,700 levels after hitting a 7-year high of $1,718 an ounce on April 14, will shoot up to $3,000. Though many dispute this, most agree that a boom cycle is on in the yellow metal. The basic, most simplified premise is that the economy will remain sick in the medium term, giving gold the wings. Analysts put it axiomatically - the worse it is for the economy, the better for gold.

What spurred gold's spike was the move by governments across the world to funnel out money to ease the coronavirus pain on businesses. The safe haven value of gold increased dramatically in the wake of the disbursal of trillions of dollars of cash stimulus. The plunge in equities as well as the off-color commodities also helped the gold rally. "The flood of new money digitally printed by the central banks and huge debt pile by the states to fight the negative impact of the coronavirus are helping gold," says Commerzbank analyst Carsten Fritsch.

Singapore: Police arrest 6 men for selling counterfeit items, 45 fake gold bars seized

3 factors could propel gold to $3,000

Bank of America said last week that gold was poised to hit all-time high in 2020 and that gold prices could soar to $3,000 in the next 18 months. "As economic output contracts sharply, fiscal outlays surge, and central bank balance sheets double, fiat currencies could come under pressure. And investors will aim for gold," BoA analysts said.

Economists say three crucial factors will drive gold to its bull super cycle. First, the contraction in the US economy is predicted to be a whopping 30 percent in the wake of the ongoing economic devastation resulting from the coronavirus outbreak. And there is more bad news to come, investors fear. Even as the Federal Reserve prints currency in order to expand its balance sheet, the lure of gold will simply go up. Second, interest rates will stay sub-zero in most of the developed economies for a very long time, leaving an impact on currencies. Third, there has been runway growth in government debt in recent years, and this is going to balloon further in the wake of the virus crisis.

And it's not just because of coronavirus

Numbers show that gold was at the cusp of an upward move even before the coronavirus outbreak jolted markets. Analysts had pointed out in February that gold had broken off from the bear super-cycle in the commodities segment. "The bear is getting old, which we believe is a positive sign. Now, nine years into the bear, historically this is the point in the bear super-cycle when select individual commodities typically begin separating themselves from the pack," John LaForge, head of Real Asset Strategy at Wells Fargo, told Kitco News on February 19.

Gold rallying on 'debt deflation probabilities'

US Dollar
US Dollar Pixabay

The US dollar is holding good despite the US becoming the worst hit by the coronavirus epidemic. Interestingly, both gold and the US dollar rose in the initial weeks of the global pandemic, bucking the trend of both moving in opposite directions. The global reserve currency has so far averted a drastic fall, which would have caused an immediate spiral in gold prices. However, despite this, the dollar will continue to remain a major factor propelling a gold rally, analysts say. According to Goldman Sachs hedge-fund manager Raoul Pal, a dollar collapse would not happen just because the Fed will print a lot of money to backstop the financial woes of the pandemic.

"All attempts to create more money to solve the dollar standard issue tend to devalue all fiat versus gold. Gold is rallying on debt deflation probabilities," he said, according to MarketWatch. "You see the biggest problem the world faces is the dollar. We are in a vicious doom loop where slowing growth causes the dollar to rise, which causes slower growth, which causes the dollar to rise, as all borrowers play musical chairs to get access to the dollar to service debts," he explained.

Gold prices and debt ratios

There is a direct connection between US debt and gold prices -- gold zooms when the government debt swells. The US government debt, which stands at more than $21 trillion, is expected to broaden further. The US debt is already larger than the combined of all the countries. This debt spiral is happening not only in the US but in most economies, possibly triggering a debt crisis. Some analysts calculate that total household, corporate and sovereign debt will hit $250 trillion globally.

The coronavirus epidemic and the economic destruction it has caused have amplified the distrust in debt-based fiat currencies. And this will only propel gold further.

Gold supply side

Apart from the demand pull, gold prices will also see a supply side push in the coming months. After peaking at 3,503 tonnes in 2018, gold output edged down to 3,463 tonnes last year. Gold analysts note that this drop was the first in the last ten years. It is estimated that gold output will drop further in the days ahead by factors including the hurdles created by the coronavirus epidemic.

There are many analysts who believe that a great bull run in gold is about to start. But as always, a bull super cycle will be followed by the bear grips. Investors who burnt their hands in the 80s following a phenomenal boom and bust will know better!

Related topics : Coronavirus