Market Watch: Conditions are Ripe for the Price of Gold Bullion to Double

Article by Ivan Martchev in The Wall Street Journal Market Watch

Gold bullion has not done what it did during the past month since 2008.

The Midas metal shows rapidly rising relative performance against the CRB Index as industrial commodities are crashing due to the coronavirus effect. Gold bullion is staying firm, close to a multiyear absolute high. This dynamic has caused bullion to register a relative all-time high compared with the CRB Index.

What happened to gold bullion after it registered its previous all-time high relative to the CRB in 2008? It doubled in absolute terms to peak above $1,900 in 2011.

We have a similar environment at the moment. Interest rates have been dropped to zero at the fed funds rate level, and the federal deficit will be larger than 10% of GDP (larger than after the 2008 crisis) due to the $2 trillion bailout. Record deficit spending and the Federal Reserve’s quantitative easing (QE) with no preset limits is the perfect environment for gold bullion.

The difference with 2008 is that this is a government-mandated recession. The government has to stop the economy in order to stop the coronavirus. It’s like turning off the circuit breaker on a whole house and having backup power for part of the house only. Second-quarter GDP growth in the U.S. will be down double digits in the 20%-40% range. GDP numbers are reported on an annualized basis, so if U.S. GDP is down 10% from the prior quarter, it is reported to be down 40% on an annualized basis.

With record deficit spending and interest rates at zero, we may be faced with an environment where the Fed will keep interest rates below the level of inflation for some time until the economy normalizes after the outbreak is controlled. This would be the perfect environment for gold bullion.

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