Gold is cheap; Prices are expected to reach $ 5,000 in the medium term, says economist

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(Kitco News) – Gold prices could climb to $ 5,000 in a few years, says John Butler, author of The golden revolution. “

Butler attributed this price growth to the longevity of the flexible monetary and fiscal policies that will flow from COVID-19, as well as golds historic performance during periods of declining economic growth.

Based on the historical model of the 1970s, and stagflation, and other times this kind of thing has happened, I think gold will go up, in order of magnitude, “Butler told Bilal Hafeez on the Macro Hive podcast. I think it is perfectly realistic to see gold closer to $ 5,000 than it is today in a few years. “

Regarding the lasting effects the pandemic will have on the economy, Butler said that political reforms are here to stay.

Politicians jump on any opportunity to try to advance their favorite program, and in some cases it could be a very well-intentioned program and in other cases it could be a way to try to increase their power and influence. I see all of the above right now, “he said. The other thing is what Milton Friedman said decades ago: [which is that] there is nothing more permanent than a temporary government emergency program. “

Although gold has already reached historically high valuations, Butler said that just looking at the price in nominal terms may not give a complete picture.

You have to ask yourself, “Is the nominal price of gold really that meaningful?” I’m not sure if that’s the case, because if you look at the gold deflated by the CPI, or a stock index deflated by the CPI, or for that matter a credit index deflated by the CPI, and you start comparing gold to these other traditional stores of value, in fact, gold probably looks cheap, “he said.

Developing a framework for identifying the fair value of gold can be done by examining other macroeconomic variables that have a definite correlation with the yellow metal, Butler noted.

The ones with the most explanatory power over both the median and the long term are real interest rates and long-term oil prices, and I emphasize that long-term rates, that is, – say come out of the curve. The reason is that intuitively, the real interest rate is the natural compromise between opportunity cost and holding gold, “he said. The oil relationship, however, is really a proxy for what is a general energy relationship, since energy is the only truly universal input. Even human labor requires that energy be executed in an economic added value. “

The long-term price of energy then becomes the opportunity cost to extract gold from the ground, he said.

Butler argued that golds the ability to store wealth, especially during bear markets, makes it an invaluable resource.

He highlighted the 1970s and early 1980s when stocks and bonds behaved badly.

There has been a long time where gold has outperformed the two and outperformed by a margin historically very, very large, “he said.

From 1970 to 1979, the price of gold rose by more than 1,300%, from $ 35 to $ 512. During the same period, the S&P 500 fell more than 50%.

During economic shocks, such as the oil crisis of the 1970s, investors should not be exposed to assets correlated with economic output, said Butler, and rather be exposed to economic inputs or commodities.

He noted that taking gold into accounts historic performance, a balanced portfolio should include 10% to 20% gold, which is much higher than most investors.

In addition, goldThe supply, compared to other sources of money like cash, gives it a relatively cheap value.

Warning: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has done everything possible to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to exchange goods, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept guilt for loss and / or damage resulting from the use of this publication.

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