Although gold has already crossed historic highs in several foreign currencies, this is the first time since 2011 that the yellow metal has seen new highs in US dollars.
At 7:00 am EST, spot gold was trading at $ 1,944 per ounce.
In 2011, gold did not consolidate around the top and formed a plateau; on the contrary, the metal recovered almost immediately, initiating a long-term downtrend which reached a low in December 2015.
This decline from the peaks of nine years ago must also be put in context; September 2011 was already three years after the start of the last great recession, and gold was already in the final stages of a three-year bullish rally that began in November 2008, at the onset of the economic recession.
Since 1979, there have been five recessions, including the current one that began in February 2020, as designated by the National Bureau of Economic Research (NBER).
It is important to note that gold has not rebounded during any of the previous four recessions, and only saw a bull market manifest after the end of two recession periods: 2001 and 2008-2009, as shown. the graphic below.
The chart above shows the Federal Reserve Funds rate (blue line), plotted next to the price of gold (orange line). From 1979 to 2008, gold and the Fed funds rate evolved simultaneously; As interest rates experienced a secular long-term decline from the late 1970s to the mid-2000s, gold followed this downward trend. The decades-long downward cycle in gold prices reached its lowest point in the early 2000s and rose steadily alongside rising interest rates until 2007.
The first gap between gold and interest rates occurred in 2008, when the onset of the recession triggered several rounds of quantitative easing, bringing interest rates down to near zero, where rates are remained until they were relieved at the end of 2015.
During this period of cohabitation on the part of the Federal Reserve, which reduced rates to a level never seen before, gold continued to climb until it reached its peak in 2011.
What sets the 2000s apart from previous decades are the sharp increases in gold prices that followed interest rate cuts, once in 2008, and more recently this year, when the COVID-19 pandemic hit. bursts.
Many analysts have attributed this unusual trend to record levels of monetary stimulus.
“Over the next three years, if we look back, if [history] repeats itself, from 2008, 2009 to 2011, this three-year period saw gold go from a range of $ 750 to $ 800 to $ 1,900. If we predict that because we have the same expansion of the Fed’s balance sheet, then that would project that if the cycles are exactly the same, gold could reach $ 4,000, ”Holmes said in an interview.
He noted that while the Fed has already set records on the level of monetary stimulus injected into the economy, quantitative easing will not stop until the central bank’s balance sheet exceeds $ 10 trillion.
“It’s going to cost the US government about $ 10 trillion in fiscal and monetary policy to get the economy back on track, so I think that number that you see after 2008, 2009 after the Lehman Bros. bankruptcy, you saw the balance sheet go up. from $ 1 trillion to $ 3 trillion. I think it needs to reach the total of $ 10 trillion, ”he said.
Holmes is not alone in his long-term bullish outlook. Dan Oliver, founder of Myrmikan Capital, sees prices heading towards $ 10,000 an ounce.
“The Fed, as you know, has been on a massive buying spree due to the viral situation, and therefore the breakeven price of gold is increasing proportionally, and therefore the numbers now to balance this balance sheet are extremely high, ”Oliver said in an interview. ” My [forecast for gold prices] changed. I’m at $ 10,000 now. “
Still, some analysts see prices overheated in the short term.
Rick Rule, president of Sprott US, said the possibility of a price correction arises before a more substantial rally takes place.
“If you asked me about my two or three year gold price outlook, I’m so optimistic that I’m extremely optimistic,” Rule said in an interview. “If you were to ask me about my gold price outlook over the next couple of months, I suspect it could have gone too far, too fast.
Rule added that investors can expect high volatility in gold in the coming months.
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