I have been thinking a lot about the James Bond villain Auric Goldfinger in 2019 – and why not? Spot gold has generated a stellar 17% profit in 2019 to date, despite King Dollar, the fall in the Volatility Index to 13 (minimal fear, maximum greed) and a epic bull run in Wall Street equities. I will never scoff at a 17% return, 16% better than what a local commercial bank pays on a savings account (though they lend deposits in auto loans and credit cards at 20% rates that would make a loan shark blush). I am convinced that gold will continue to rock to my $1650 an ounce target in mid 2020.
One, the Federal Reserve cut the overnight borrowing rate thrice in 2019. The Powell Fed could well cut rates again at two 2020 FOMC conclaves and slash the Funds rate to 1% if the US economy weakens. If not, the December FOMC made it clear that there will be no rate hike in 2020. At any rate, the Fed is in easy money mode even if inflation overshoots its 2% target. This means Jay Powell wants to engineer negative real interest rates, high octane fuel for the yellow metal.
Two, I believe the new SDP leadership in Chancellor Merkel’s coalition makes a German fiscal stimulation inevitable. The ECB has reached the limits of its monetary largesse with its multiple LTRO/bank lending program, as Mario Draghi had complained ad infinitum in the twilight of his career. This is the reason the German Chancellor and the Élysée Palace chose to nominate IMF managing director Christine Legarde and not Bundesbank President Jens Weidmann as the incoming ECB President. The French strikes mean Macron will also pressure Berlin on fiscal stimulus. Add this to China’s tax cuts and monetary easing. Net net, the world is on the brink of reflation on a planetary scale. Easy money and reflation make the yellow metal (Auric) rock!
Three, I saw unmistakable signs of accumulation and new money flows into gold miner indices relative to flows into Dr. Copper, iron ore, nickel, lead and aluminum, poor sad sack of the industrial metal complex. This has historically meant a stronger bid in gold bullion to me. When junior gold miners begin to boogie, it is time to rethink gold’s prospects.
Four, I expect the recent OPEC 1.7 MBD output cut brokered by Saudi Energy Minister Prince Abdelaziz bin Salman and Russian Oil Minister Alexander Novak to nudge Brent crude oil prices higher in 2020 – ipso facto, a bullish omen for gold.
Five, I expect a major rise in the British pound and some commodities/energy market currencies against the US dollar in 2020. If the US Dollar Index closes below 96 (it will), a tsunami of trend following FX hedge funds/CTA’s will begin to execute preprogrammed bearish trades. The inverse correlation between gold and the greenback could then reerupt in the financial markets with a vengeance.
Six, the US financial press reported that there was massive buying of the COMEX gold June 2021 call options contract with a strike of $4000. This blew my mind since an uber-bullish trader has taken a 5000 contract (100 ounces a lot) position that gold will rise to $4000 in the next eighteen months. Why? Is this a call on an Elizabeth Warren White House or a sinister geopolitical event US intelligence agencies should investigate?
Seven, with US equities at an all-time high due to dramatic valuation multiple expansion and credit spreads in the debt market dangerously low due to a quantum increase in leveraged speculation, I expect financial stability metrics to deteriorate in 2020, a bullish augury for gold. In the emerging markets, entire banking systems are…well, bankrupt. They do not lend because they cannot lend, as is the case with India’s zombie shadow banks. I remember buying gold at $700 an ounce just before the post-Lehman, Greek sovereign debt market Armageddon. Gold soared to $1930 an ounce in September 2011, its last price peak. Will history rhyme, if not repeat, as Mark Twain put it, next year? Yes, it will.
Eight, from populist rage in Europe to the Hong Kong protests, from civil wars in the Arab world to geopolitical confrontations from North Korea to the South China Sea, from anti-regime protests in Iran and Lebanon to military coups in Africa, from new climate change/cyber-security shocks, I see the world becoming a more fragmented, more dangerous place. The inevitable fallout? Geopolitical risk goes ballistic and gold has been the ancient hedge against a world gone mad since the time of Cleopatra and Genghis Khan.
Nine, global central banks are forced to increase their gold purchases due to “dollarization” pressures (just ask any rich Egyptian, Argentine, Pakistani or Lebanese what this means), I expect another 800 million tonnes of central bank purchases in 2020. The Russian rouble is the world’s first de facto gold-backed currency. China is also justifiably paranoid about its vulnerability to the same draconian US Treasury sanctions that have crippled the economies of Cuba, Venezuela and Iran. I expect the Powell Fed will even ignore embryonic wage inflation pressures implicit in the November jobs data in 2020 while central bank accumulation of gold accelerates. This means the mother of all gold bull runs.
I will ignore silver for now as global industrial demand for the white metal has contracted while mine supply from Mexico and Peru will surge in 2020. I believe the supply-demand equation is far better in copper and iron ore, the reason I have accumulated Freeport McMoran and Rio Tinto PLC shares on the NYSE. In metals trading, fundamentals matter and so I am proud to be a fanatic fundamentalist on gold!
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