Gold has approached its current level (in US dollars) four times since 1971 on an inflation-adjusted basis. More recently, two years ago, the face price was near $2,100/oz and we are now a little below $2,000/oz.
It seems to me that there will probably be a breakout in the price of gold that will gain momentum. Why now ? Because the price of gold moves in the opposite direction to real interest rates (the interest rate a bond pays after the effects of inflation). Real interest rates are negative right now because inflation is high and interest rates are low. This means that most holders of US government bonds benefit from a negative real interest rate.
People are interested in gold because they are worried about their future purchasing power. For now, the market is still wondering if the US Federal Reserve (Fed) will be able to raise interest rates up to seven times this year and if inflation will weaken significantly. In our view, this is the reason why gold has yet to surge – the market is focused on relatively belligerent sightings. The trigger for gold could be when inflation surprises on the upside or the market accepts that seven US interest rate hikes are a bit too aggressive. We believe this would lead to a surge in the price of gold.
We consider gold as “riskless money”. Central banks too. That’s why they usually have huge gold reserves. They know what is risky and what is not. We believe that gold measures the future purchasing power of every currency issued by governments. This is why you see them all degrade at different rates compared to gold. People say gold has no value, but we think gold adds value to everything else.
The demand for physical gold is increasing, and it has been increasing very steadily throughout my career, as people want to own physical gold as a hedge and central banks want to buy more of it.
The silver market is ten times smaller than the gold market, but the price of silver is strongly correlated to that of gold. I think when gold comes out of the rut, you will see participation increase significantly in the market, and silver will also outperform. And this, in a very significant way, in our opinion. Unlike gold, where all mined gold is available on the market, silver is not, which is consumed by industry and in small quantities by investors. The silver market tends to be more volatile than the gold market, but overall silver follows the movement of gold.
We are convinced that investors have every interest in holding gold and silver bullion; mining stocks theoretically offer more upside, but also certainly carry more risk of loss. However, when participation in the physical gold market is broader, we believe that the valuation of miners’ stocks will benefit.
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