Gold has had a resurgence of late. Is it because in this volatile market investors want to put their money toward something solid, or is it something else?
On the surface, yes, investors are putting money on gold because it feels safer than the current rocky seas of our global markets. Gold has always been a safe haven, and after the stock market’s awful start to the new year that has continued into February prices for the precious metal have risen by about 6%. After a few years of falling value, it appears that the downward trend has reversed and gold is gaining but is not yet at its peak, which makes now a good time to invest. And that’s just for physical gold, gold ETFs are on an uptrend as well.
However, the Fed has recently raised interest rates and there is a promise of more rate hikes coming. Gold doesn’t pay interest, which should mean now would be an unfavorable time to buy gold, but gold is defying this convention and rising anyway. Why? Because in its last meeting, the Federal Reserve articulated a less hawkish stance on a previously projected rate rise in March due in large part to the slowing in China that is dragging down the predictions for the global economy—and the U.S. economy— along with it. This vocalized a growing fear and has gold gaining to its highest price in 3 months.
But apart from market volatility and growing fear, what reason is there to buy gold? Answer: there are other things happening in the gold market that investors should be acutely aware of as they will make a dramatic impact on the future value of gold.
As I’m writing this, gold sits at roughly $1,126, but by the end of the year I believe we could see it go to $1,300 or higher, and in the years to come it is bound to become far more valuable. The following are few of the big circumstances that make gold a good bet now while prices are still relatively low.
Central Banks Are Collecting Gold
For several years now, central banks world-wide have been beefing up their holdings of gold, especially China and Russia. Of course this may be safe-haven buying, or related to diversification, but other factors make me think that there is more going on. In fact, figures from the People’s Bank of China show that they aren’t merely setting gold aside for a rainy day, they have in fact boosted their gold holdings by more than 6% since announcing in July 2015 that they have had a 57% percent jump in their gold holdings in the last 6 years and have been urging the Chinese people to buy gold, resulting in record imports.
So why are China and other countries stock-piling gold? It likely has to do with the devaluation of currencies the world over.
When the world was plunged into recession in 2008 – 2009, the Fed and other central banks around the globe stimulated economies by printing massive amounts of money. This resulted in boosted economies, certainly, but it was an incredibly risky monetary experiment, and now currencies are being devalued as a result of the money printing and central banks are collecting gold as a hedge. Central Banks are now running out of options for boosting up their economies and are reaching for tools that seem to point to a race toward devaluing paper currencies around the world that could result in an all-out currency war, as evidenced most recently by Japan’s new negative interest rate policy.
Gold has become the safe haven of choice for anyone with exposure to a weakening currency, and Michael Armbruster of Altavest said to MarketWatch that “gold’s strength is based on flight to safety from the world’s money-printing central banks.”
As countries continue to accumulate gold in huge quantities to back their currencies, it is unlikely that the price of gold will remain low for much longer.
Another Global Recession is Coming
Volatility in global markets, economic slowing world-wide, plunging oil prices, geopolitical uncertainty, and trillions of dollars of debt piling up across the globe have recently sparked a lot of speculation about the next financial crisis. Some of the biggest names in the financial world have warned of another global recession coming as early as this year, with George Soros citing a collapse in China and Jeffrey Gundlach warning that the high-yield debt market could implode. If either of those predictions become true, or worse if they both did, the world would undoubtedly find itself plunged into another recession that could very well be more harsh than the last.
On national levels, it’s undeniable that the U.S. has enormous debts, as do France, Britain and Japan, etc. One unknown event could send a nation into what Vice called a “debt death spiral” reminiscent of Greece, but on a much larger scale. The U.S. alone has accumulated over $19 trillion in national debt, and there is a $29 trillion corporate debt hangover that could prove to be a catalyst for another recession.
Should the debt bubble burst, central banks will have to develop new tools with which to boost up their economies—like the Federal Reserve’s multiple rounds of Quantitative Easing after the last financial meltdown—though a meltdown of the world’s debt bubble may be of too great a magnitude to impact an inevitable collapse. Such a crisis would see people scrambling into the gold safe haven in droves and would inevitably drive up the price of the yellow metal far higher than the $1,900 an ounce it reached in August 2011.
The World is Running Out of Mineable Gold
In the next two decades rare gold will become seriously scarce.
Goldcorp, one of the largest gold producers in the world, released a slide in 2014 that estimated peak gold production was expected in 2015. When peak gold is reached global production declines until gold prices spur producers into identifying new sources and begin mining them. While peak gold happens regularly—four times since 1900—new deposits of the precious metal are becoming increasingly less common, and the new deposits that are being found contain smaller quality quantities that are becoming increasingly harder to mine.
MarketWatch quoted Eugene King, European metals and mining analyst at Goldman Sachs, as saying “The combination of very low concentrations of metals in the Earth’s crust, and very few high-quality deposits, means some things are truly scarce.” It is an inevitability that gold producers will run out of deposits of mineable gold, the question is when. Goldman Sachs and the Visual Capitalist have both reported that it will happen within the next 20 to 30 years.
History has taught us that when gold looks like its going to hit absolute zero, producers expand their search for gold to less accessible places and technology advances to create new methods of extracting the commodity. However, the reality is still that technological advances of a certain magnitude take time, and that gold is scarce and this planet will run out of new deposits of it.
For more than 4,000 years gold has been used as a measure of wealth, and I see that as only becoming more true in the coming years and decades. While gold can be recycled and reused, the impending shortage of new gold will send prices skyrocketing if there is even gold available to buy. For those investors who invest in gold now, this will mean that their holdings will skyrocket in value. For those who don’t, this could mean that gold will become unattainable.