Gold’s vicious selloff has destroyed investor morale. It’s trading at US$1,216.50 per ounce this morning — a four-month low.
My forecast on the yellow metal hasn’t changed. You should expect gold to hit US$931 per ounce before it moves substantially and substantially higher. I don’t know when that will happen, mind you.
But I’m looking at the situation objectively. Among multiple other factors impacting the gold price, central banks across the globe are looking at raising interest rates.
The UK’s inflation rate is well above the Bank of England’s target. Now the BOE’s hinting at raising rates.
The US Federal Reserve is well ahead of the bell curve. It’s already raised rates a few times. The Fed now wants to unwind its US$4.5 trillion balance sheet.
The European Central Bank (ECB) must be envious. The Italian banking system is insolvent. France, Italy and Greece need massive structural reform. Germany’s pension system is also facing a crisis. The ‘one size fits all’ interest rate policy hasn’t worked for the Eurozone. And there’s nothing the ECB can do to solve its problem.
Of course, that doesn’t mean it will stop trying…
Mario Draghi’s out of ideas
Bloomberg reported on 8 July:
‘European Central Bank policy makers continued to air their differences over when to rein in stimulus, sending conflicting signals on whether pumping cash into the economy for much longer will help the euro area or hurt it.
‘“Underlying inflationary pressure remains subdued” and “we still need a long period of accommodative policy,” Executive Board member Peter Praet, the ECB’s chief economist, told Belgian newspaper De Standaard in an interview published on Saturday. Governing Council member Klaas Knot, speaking on Dutch television on Friday night, warned that the central bank is “very close to the point” of keeping quantitative easing for too long.
‘The remarks reflect the dissonance since the start of the year in the Governing Council over when officials should discuss winding down their 2.3 billion-euro ($2.6 billion) asset-purchase program. Praet has consistently called for patience, while colleagues such as Knot and Germany’s Jens Weidmann have warned against leaving it too late, and Executive Board member Benoit Coeure has said a failure to be transparent can increase market volatility.’
The warning from Jens Weidmann (President of Germany’s Bundesbank, and Chairman of the Bank for International Settlements) is a little too late. The ECB’s money-printing experiment has caused a gigantic debt bubble. To make matters worse, governments have borrowed and spent wildly during the near-zero interest rate period.
The big question: Who will buy government debt when interest rates move sharply higher?
No one with a rational mind. That’s because bond prices move inversely to interest rates. When interest rates go higher, bond prices fall. Fresh buyers will need an incentive to take on the additional risk of the bond prices falling even further.
We could soon be looking at 4% interest rates around the world. If history is any guide, it could happen extremely quickly. Once traders sniff a major debt crisis is on the cards, bonds will crash and interest rates will skyrocket further.
The 30-year government bond bull market is over. Global central banks are trapped and have printed nearly US$14 trillion.
It’s downhill from here…
Few people have considered the risks of what will happen next. Central banks won’t be able to sell their debt at these ultra-low interest rates. Neither will the government.
Interest rates must rise, which will increase the cost of funding. That’s likely to bring down the entire global debt system, which has been happily living on cheap money. But that system is unstable and insolvent.
The US Fed doesn’t seem to notice. The ECB isn’t paying attention either…
Gold will probably fall
The ECB has backed itself into a corner and now owns more than 40% of Europe’s government debt. That’s debt from governments facing a major risk of default. Defaults which will carry over onto the ECB’s balance sheet. When that happens, the sovereign debt crisis will go global.
Gold will probably fall. The yellow metal has crashed during every financial crisis dating back to 1971. People will sell gold to pay off their debts and other needs. Gold is an asset, not money. You can’t use gold to buy bread at a supermarket.
In the modern-day world, Bitcoin and other emerging cryptocurrencies should prove far more useful during the meltdown. To find out more, go here.
Nevertheless, if gold won’t survive the coming debt crisis, stocks probably won’t either. In my view, stocks could fall by 30-50% during the government bond crisis. Commodity prices should follow as the global economy crashes.
What follows will be completely different, mind you. The Dow Jones could double. Gold could quadruple. The best junior gold stocks could jump 10-50 fold. That’s why you should start looking at the best gold juniors today.
What I like to call ‘penny gold’ stocks merely need to hit a rich vein to see their share price explode. That can also happen if they unveil a major resource upgrade that exceeds expectations…or get taken over by a bigger rival…or announce an exciting acquisition.
And any of these share price catalysts could play out on any given day. That’s what I love about these small explorers. You might not even need to wait for the next financial crisis to take place.
If you’re serious about investing in the best junior gold stocks, go here.
Editor, Markets & Money