Investor Place: Is Gold's Rally Over?

October 02, 2020

Article by Jeff Remsburg in Investor Place

After setting a record-high in early August, the precious metal fell prey to a bear attack, dropping 8% since its all-time high, nearly two months ago.

What are we to make of this? Is it just a temporary pullback within a long, climb upward? Or is this just the first leg down in a longer correction?

Well, regular Digest readers know that this bear attack wasn’t much of a surprise. Given the yellow metal’s meteoric rise over recent months, we’d been recommending investors prepare for a pullback. After all, healthy rallies need pauses to digest their gains.

But a near-10% pullback from top-to-bottom has been a larger dip than many expected. So, has gold’s bright future dimmed at all? Today, we’ll hear from our global macro specialist, Eric Fry.

In the past, he’s gone on record as saying that he expects gold to double within the next two-to-three years. So, today, let’s find out if that forecast is still in the cards.

The driving force behind recent gold weakness

Eric is our global macro specialist. This means he evaluates markets and asset classes from a big-picture perspective to identify attractive opportunities. Once something is in his crosshairs, he digs down to find the right, specific investment to play the opportunity. It’s been an effective strategy …

In his decades in the business, Eric has dug up more 1,000%+ gaining investments than anyone we know of in the industry.

In recent months, he’s combined his strategy with gold to help generate a slew of triple-digit returns.

Dollar strength

If you’re less familiar with this relationship, the dollar and gold tend to move in inverse directions. As the dollar loses value, it requires more of those dollars to purchase the same quantity of gold as before — driving up gold’s price.

In Eric’s update from Tuesday, he wrote that while the dollar might have won this latest battle, it won’t win the war.

In explaining why, he begins by traveling back to the financial crisis of 2009.In February of that year, gold set a new record high. Now, that makes sense — the stock market was imploding at the time so investors funneling money into the safe-haven of gold is logical.

Yet within three months of gold’s highwater mark, stocks had rallied 30%.With stocks back on track, gold’s gains should have evaporated, right? It would make sense that investors would rotate out of safe-haven assets, back into riskier assets, like surging stocks. It didn’t work that way. Instead, gold went on a massive run. Here’s Eric to explain why:

“Federal Reserve Chair Ben Bernanke’s quantitative easing program was simply a new twist on an old tactic called “money printing.”As such, this program undermined the dollar’s value to some extent and boosted the value — and appeal — of gold. Even though the gold price was trading near a record high in early 2009, it would double over the next two years.”

So, even though the fear-based reason for owning gold disappeared, the monetary policy of the Fed had provided a sustained tailwind that drove gold’s price higher for years.

Eric writes that part of gold’s recent, new all-time high is attributable to similar, aggressive money printing. In fact, under Federal Reserve Chair Jerome Powell, our own central bank spent $2 trillion in just five weeks in late April and May. Eric calls this “2009’s QE on steroids.”

We saw how much gold’s price climbed the last time there was a binge of QE. What’s unclear is what a vastly greater amount of QE will do this time for gold … and “down” isn’t the likely answer.

But what about recent dollar strength? And will this strength continue to weigh on gold?

Back to Eric for that answer: “The dollar may have bounced on news that fiscal stimulus from the U.S. government is stalled thanks to political gridlock, but neither side of this political fight has walked away from the negotiating table yet. Another round of deficit spending could supercharge the gold rally, pushing it toward ..

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