“The rally tells investors that the financial system with the US dollar as the reserve currency, [might need] some changes, ”Piquard told Kitco News last week.
Global debt and unlimited printing of money erode confidence in the US dollar as the world’s reserve currency.
“The US dollar system has worked so far. But we are getting to the point where there is so much debt in the world and with this new crisis, there is even more debt, ”Piquard explained. “People are realizing that they may need to change the way the US dollar acts as a reserve system. The United States is probably going to have to print a lot of dollars to bail out all that debt. It really fuels the gold rally.
The market is also realizing that rising gold prices are inevitable due to the situation the Fed and the US government have been forced into.
“Investors are seeing that this COVID crisis is not going away anytime soon. Cases continue to increase around the world. And the longer it takes, the more debt has to be created, ”Piquard said. “Congress is debating how many trillions of dollars it is going to have to spend on a new stimulus after spending trillions of dollars already.”
And even once the COVID crisis is behind us, the economy is going to be weak for a while, Piquard said.
“Once all this money is spent, it’s not like you’re going to be able to raise taxes to get this money back, or it won’t be easy to raise rates,” he said. “The market predicts that the Fed will have to do more. And all of these things are only good for gold.
The Federal Reserve cannot just get back to normal. “It will just be negative for everyone. Nobody really wins in this scenario, ”Piquard noted.
Inflation versus deflation argument
There are currently two camps: inflationary and deflationary. In the inflationary scenario, gold will do very well, while in the deflationary scenario, the yellow metal will behave badly, Piquard explained.
“Deflationists think gold will go down a lot, stocks will go a lot lower and the US dollar will go a lot higher,” he said. “Basically what they’re saying is there’s all this debt in the world and everyone’s borrowed US dollars and they’re going to have a hard time paying it off, especially with a weak economy.” … When they have to pay this debt off, everybody’s going to be scrambling for the US dollars and that will bring down asset prices, which makes the US dollar go up.
Gold bulls believe in the inflationary argument that sees the Fed stepping in and not letting deflation take over.
“All the Fed has to do is buy what is sold. And that’s kind of what they did, ”Piquard said. “They bought bonds first. Now they say they are going to buy companies. Central banks around the world are already doing this. The Japanese have been buying stocks for who knows how long the Swiss central bank has been buying stocks. “
Based on the inflationary scenario, the Fed will continue to intervene, print more money and weaken the US dollar. “It’s positive for gold, which is the only asset you can’t print,” Piquard said.
Inflation doesn’t even have to go much higher, the portfolio manager added. “All we need is rates to be extremely low for an extremely long time and inflation to be a little higher. As long as the real returns are negative, it’s good for gold. “
How to know the gold price rally is over
The gold market has yet to peak with even more upside potential ahead of the precious metal, Piquard said.
A major sign of a gold market peak is that silver prices are catching up and hitting all-time highs of $ 50 an ounce.
“The price of silver typically hits new highs near the end of a bull market for gold,” Piquard said. “The reason is that silver is more of an industrial metal, which is used more in the economy. So when the money starts to rally, it implies that the economy might pick up. “
So far the money has increased, but it is still well below its records. At the time of writing, Comex silver prices in September were trading at $ 24.365, up 0.62% on the day.
“Gold has hit new all-time highs and I think we also need silver to reach its old highs. Then there could be an indication that the economy is doing better. Once we see the silver catch up, maybe it is a sign that the bullish rally has less room to maneuver, ”Piquard said.
Another sign of a leading market is the economy recovering and exceeding the Fed’s 2% inflation target on a sustainable basis. “The Fed has said it will only raise rates once inflation rises above its benchmark rate of 2%. It could take a while – a year or more, ”Piquard noted.
Gold miners present a unique buying opportunity
In this very competitive market, gold miners present an attractive buying opportunity, according to the portfolio manager.
“In terms of relative value, miners offer good [deal]. At over $ 1,900 an ounce, most miners are making money. Miners are significantly lower than the prices they were in 2011, ”he said. “Not all miners are created equal, but if you buy a wallet of them, they offer a bigger margin of safety because even if the gold goes down a bit, they still make money.”
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