By March 2017, I believe we could see gold move back up over $1,400 per ounce.
The fact is that, President Donald Trump or no, come next January, the U.S. will still be firmly ensconced in an era of reckless monetary policy. It’s no stretch to say that the current money system cannot sustain itself. Many years of low interest rates — and, more recently, negative real rates — have wrecked the financial future of a large portion of U.S. households.
The breakdown in U.S. monetary policy is just a question of time. And we think the starting gun will go off this December, with a loud shot fired by the Federal Reserve.
Last December, at the end of 2015, the Fed implemented a tiny, quarter-point interest rate increase. The dollar strengthened and investors fled the market, causing huge share price drops in January and February.
Looking ahead, the Fed is likely to raise another quarter-point this December, repeating the mistake of December 2015: raising rates in a weak environment.
The economy isn’t strong enough to support the rate increase, tiny as it may be. But the Fed isn’t increasing rates to cool off the economy. This is a tactical move to give the Fed more room to cut rates during the next recession.
Fed policymakers have outright admitted that rates will probably plateau after December, meaning they’ll remain far below historical norms. This also means that the Fed won’t be able to cut rates far enough to truncate the next financial collapse.
If the Fed and stocks repeat their December 2015 playbook, expect gold to repeat its 2016 trajectory as well: Let’s look at a chart of the last two years of gold prices:
As the chart shows, gold prices drifted down in the second half of 2015, reaching a low point at the end of December, just after the last Fed rate increase. It’s like what has happened in the last few months of 2016, too.
Then as 2015 rolled over to 2016, the Fed raised rates, and gold took a big leg up in January and February, all while broad markets were tanking. Gold hit a first peak around March 2016. After June 23 and the Brexit vote, gold moved up another leg, hitting above $1350. Overall, gold made a $300 move upwards after the Fed raised rates last December.
Since mid-August of this year, and as Brexit euphoria faded and U.S. elections heated up, gold has fallen hard below its 200-day moving average. In the next chart, the blue line starting in August represents the 200-day moving average of gold.
Look at the recent gold price move, downwards. As you can see, the moving average is $1281 per ounce. But currently, gold is trading around the $1210 level.
After Trump’s victory on Nov. 8, many other sectors across the markets firmed up solidly — like banking, infrastructure, aerospace and pharmaceuticals. But gold has been steadily down since its Election Night bounce (although it hasn’t gotten close to the lows of December 2015).
What’s going on here, with the post-election gold price swoon?
Strong Hands Smother Gold
This downtrend is thanks in large part to Stanley Druckenmiller. Druckenmiller is a money titan, whose hedge fund used to boast annual returns over 30%. He recently sold off his gold holdings, worth approximately $1 billion.
Druckenmiller declared during an interview on CNBC that “I sold all my gold on the night of the election… All the reasons I have owned it for the last couple of years, it seems to me they may be ending.”
“They may be ending”? That’s a risky justification for selling $1 billion worth of gold. It’s way beyond the old saw about buying on rumors and selling on news. I understand what Druckenmiller is saying — he’s excited about Trump — but I don’t understand why he says it just now.
Consider that over many years, monetary policymakers have squashed interest rates. They have pushed legions of investors far out on the risk curve. From go-go hedge funds to greed-head bankers, from big, stodgy universities to retirees — most investors are forced to own high-risk stocks because there’s no return down at the local bank.
Then consider that the entire economy is a legacy of failed “stimulus programs.” We’re still stewing in much the same policy mix that handed the world the 2008 crash. All in all, we live in a monetary fog that has destroyed the U.S. economy and shaken its long-term stability.
There’s good news in this for us, though. And a way you could double your money in the coming months.
$1,400 Gold by March 2017
As Jim Rickards noted recently, “The gold market will soon realize that Trump’s economic plan is pure ‘helicopter money.’ [Trump] wants lower taxes and bigger spending. That means bigger deficits, and that’s what helicopter money is. The Fed will have to put a lid on nominal rates to achieve negative real rates.” That’s called financial repression.
Over time — sooner or later, and I think relatively soon — gold will continue to increase in price. It has to increase because of future inflation. The U.S. government, and governments around the world, are hamstrung by current debt and future obligations. When (not if), real interest rates rise, the cost of carrying that debt will move up fast. It’ll kill many a national account.
The Trump presidency will likely become a period of economic reflation. Trump may well begin to Make America Great Again (a Herculean task, to be sure).
There’s little doubt that we’ll soon see massive fiscal stimulus via tax cuts, defense spending and renewing infrastructure. Down the line, the U.S. may begin to book economic growth rates of 3% or even 4%. Yet that would also lead to higher interest rates, because the deflation mindset will be gone.
Looking ahead, I foresee negative real rates and higher inflation. It’s a promising scenario for gold and gold miners. I believe gold prices, and prices for mining shares, will soar in the months ahead. It will be an almost exact replay of the gold rally from December 2015 through last summer.
And with the higher lows and higher highs we’ve been seeing, I expect gold to perform again as it did earlier this year, with a possible $300 move upwards. I foresee gold moving at least back to its summer peak of $1350, and then moving along to hit $1400 per ounce in the first quarter of 2017.
I believe that we’re at a temporary post-election point of Trump-euphoria. It is pushing up the stock market. Meanwhile, distracted investors are blindly following the big gold sell-off from Druckenmiller. Buyers are shunning gold shares, which sets up an opportunity for an asymmetric trade — low risk to the downside, and strong potential gains to the upside.
The U.S. economy — and the U.S. dollar — are far from being out of the woods. In December, we’ll see a rate increase by the Fed, along with evidence of inflation across the economy and in gold prices. Buy on the current dip, and await the rebound.
This story originally appeared in the Daily Reckoning