Gold had a good run over the last year. It did fairly well in 2020 but it has not done as well in 2021. If we look at GLD or the SPDR Gold Trust, we will see that gold would hit a peak point of $193.90 in August before being fairly range bound for a couple of months until January 2021. Then, when we hit January 2021, GLD began its descent and would fall all the way to $157.49.
But it would then reverse course and rise to $177.90 by June before falling to its current price point of $166.59. That begs the question, should you buy gold? Is it going to be rangebound for a couple of months or will it (GLD) fall below $150 and maybe even head lower?
The regular word in the gold community and in macroeconomic landscape is that gold should stay strong and continue to grow over the next few years. There may be short term corrections but it should still grow over the next few years due to mathematics. But what are the mathematics that we are dealing with here? It mostly revolves around debt.
Everyone is In Debt and Gold Continues to Shine
Everything looks fine within the world right now but there is a problem; everyone’s in debt. Yes, that’s right, your households are in debt, your companies are in debt, and your governments around the world are in debt.
The word of the day is debt and everyone loves it. But the problem with debt is that you are borrowing from the future. If you take too much debt today, you have to worry about spending less in the future. You can only spend less in the future because you are not guaranteed to raise your income but your expenses are likely to stay the same. Further, the more you borrow today, the less likely that you will we able to pay it all off within a reasonable amount of time. Now, this is something crucial to think about when looking at debt, that aspect of interest rates.
If interest rates on debt is low, then you do not really worry about borrowing that much because you know do not have to pay that much to borrow that debt over time. But if interest rates extra high then you will be thinking about that debt regularly. You want to make sure to pay it off as quickly as possible so you do not end up owing much more than you borrowed in the first place.
At the present moment, interest rates all across the world are fairly low. Indeed, interest rates in various places in Europe are even in the negatives. Our current yields on the cash in the bank account or invested in US treasuries, when adjusted for inflation yields a negative figure. That’s startling but that’s the truth.
The issue is that there is so much debt that it there is no other option but to keep interest rates low to ensure that everyone is able to manage their debt. If interest rates were to rise, that could create a significant portion of problems for debtors of all types. Indeed, high interest rates could lead to sovereign debt defaults!
Indeed, the more debt one has, the more risks one takes on. If growth were to slow down in the United States and across the world, that would be an issue for governments, companies, and workers.
The Dollar May Seem Strong
The dollar could be strong in this highly indebted environment because much of the world’s transactions are denominated in USD. That means a fairly large portion of debt is also denominated in USD. As long as that stays true, there will be significant demand for the dollar in the present and over the next few years.
Now, typically, a strong dollar is bad for gold. The thinking is that if the dollar so pervasive in the world and it is getting stronger, then why would you hold gold? Why not buy US treasuries, US stocks or other assets? Well, the reason is because gold can still have value when other currencies are falling in value. Then, central banks across the world are still adding gold to their balance sheets and holding it as a reserve asset. Then, there is another issue on the horizon, inflation.
Inflation Is Here and That Could Be Great for Gold
You are quite likely seeing slight increases in certain products at your local Costco or other store. Many companies have noted that they will pass on the cost of goods to their consumers. They didn’t say that they would raise prices by a lot but they did note that they would do so to a reasonable range over the latter half of 2021. You might have also noticed that your prices at the gas pump are going up as well. There is quite a bit of issues in the present.
If inflation were to run too hot, then central banks would raise interest rates, but as we noticed earlier, central banks are in a bit of a bind. They simply cannot raise interest rates to the right level to cool off inflation or they would find their respective economies in a great deal of trouble. In normal times, they would and you would want to hold more treasures, but at the present moment, it does not make sense to do so. As such, that is another reason to own gold right now and over the next few decades.
Something Weird is Going on In All Assets
SentryHill continues to sound the alarm on issues within the financial system. We are seeing an increase in stock prices, real estate, and other assets like bitcoin and other asset classes across the world. That is a significant issue because it looks like at a point where everything is at a high level in prices, debt is also high. That is a very risky place to be in for market participants. Remember that debt is fine until something goes wrong and then you have to sell items to pay off your debts or lower your standard of living.
It is no wonder why Burry, the investor who predicted the real estate crash in 2008 is saying that you should be scared about the markets.
While many segments in the stock market went crazy and reached new highs after COVID-19, gold has stayed relatively steady and rational. If you see a significant sell off in other assets, the same is unlikely to apply to gold.