Most people,
especially those in the West, mostly perceive gold as an inflation hedge. After
some increase in gold prices when inflation rate was high, gold prices
continued its path up even faster even when inflation rate dropped to levels
before the big jump since the pandemic. I was bullish about gold in the long term
since at least early 2022. Here is what I said in February 2022 in my blog.
Gold prices
have fluctuated in most of 2022 and 2023. Since late 2023, it has gone up by
50%. Many gold producers see their stock prices more than double. Gold prices may
experience some retrace and adjustment. But is this the peak of gold prices?
I don’t
think so, because my initial bull case about gold was about much more than inflation.
1.
Gold is an inflation
hedge. In the near term, inflation rate is likely to drop even further. But unless
the supply chains have been largely friend-shored from production in China, the
potential huge inflation shock from a confrontation between China and the US
about Taiwan is still there. As the friend-shoring is going on, a lot of
production will experience cost increase with new production bases, infrastructure,
and supply chains. needing to be built. Producing in China in the first place
is because it is cheaper to produce there.
2.
West governments,
especially the U.S. government, have increased the spending substantially
during the pandemic, and have largely kept the spending level even if the
pandemic has passed. If there is any weakness in economy, more spending increases
are likely. This inflation impetus will be there in any foreseeable future. Some
of the spendings, like those under the CHIPS Act or Inflation Reduction Act,
will eventually have some effect on reducing inflation. But any of such effects
will be uncertain and far away.
3.
Such spendings have
raised government deficit substantially, especially in the US. As a result, the
Federal Reserve have not had 2% inflation as a hard target as before. The Fed have
to tolerate somewhat higher inflation rate to erase the deficit a bit more over
time, as long as the inflation rate is not much higher than 3%.
4.
Chinese economic
decline is a story that I have declared since 2011. This decline has started
exactly when I declared it. It means that there is a lack of investment options
because all the other investment options would be losing money. The low trust
in Chinese government means that more and more people will choose gold as the main
investment option.
5.
India’s economic rise is
a story that I have declared at least 10 years ago. This rise started exactly about
the time I declared it. As Indian households become more affluent, they will
buy more gold given their strong preference for gold. Note that China and India
are among the five largest economies in the world with about 35% of world
population.
6.
After the sanctions on
Russia after its illegal invasion of Ukraine, many developing country
governments realized the length the US and West would go using US dollars as a
weapon. It is only natural that they will increase gold’s proportion in their
reserves.
7.
Emerging markets have
been in a funk, especially compared to the US, since 2011, also the time that I
predicted this funk. The recent inflation surge since pandemic also hit them
the hardest even if the Western media don’t usually pay much attention in its
coverage. The households in these markets would increase their gold holding as
well.
8.
The world has become
much more uncertain and has many more conflicts. These involves the
confrontation between the West and countries like Russia, Iran, China, and
North Korea in the remapping of the Pax Americana system since the end of World
War II. These also involve the tectonic political shift within the Western
countries. For example, many people don’t think the period after this coming US
election will be peaceful. This uncertainty will increase gold buying from
everyone.
9.
In the very near term,
in November, there could be two potential inflation shocks. One is for sure,
the other depends on the election outcome. The first is the inevitable attack
of Israel on Iran’s nuclear facilities and maybe even destabilize the Iranian
regime. Israel now have achieved overwhelming military advantage over Iran and
its affiliates. The sky of Iran is almost all open to Israel fighter jets. It would
be stupid not to press this advantage and eliminate or at least set back Iran’s
nuclear program and related infrastructure. But Israelis must have been told
that they should wait until the election is over, and they probably will do
that. The second is a Trump win. He pledged an across the board tariff increase.
Even if he is not able to deliver as much as he pledged, it will still lead to
a one time big inflation shock.
I mentioned
in my initial predictions in early 2022 that I thought gold will appreciate many
times. I had the target of about 10,000 an ounce in my mind and I still believe
so. I always hate the people who give a pie in the sky forecast. There are many
such people during the 2000 tech bubble for example. But if I am honest, that
is the gold price target in foreseeable future.
Gold producers
could see their stock prices increase a lot more than gold price. They are a natural
leveraged play on gold price increases as their reserves will be revalued. Silver
prices and silver producers could see crazy price increases too. The most conservative
bet and maybe also the best bet of a buy and hold strategy may be Agnico Eagle
Mines (AEM). Some of the silver producers like First Majestic Silver have shown
very clear double bottoming pattern even on quarterly price chart. Even gold and
silver related plays may go down by a good percentage in the near term, buying on
the dip would still be the right approach.
