What are we to make of gold’s recent price fluctuations?
I’m not concerned. Gold needs a little time to consolidate above $2,800/oz. before making an assault on $3,000/oz. That has been the pattern over the last year or so. First, it was $2,000/oz., then $2,300, then $2,600, now about $2,900. Each time the market rallied, then consolidated, then rallied again to new highs. I expect new records to be recorded soon.
I’ve suggested that clients consider “buying the dip” and using price declines as an opportunity to increase their gold allocation.
If you’ve been considering gold, this is the time to buy.
U.S. gold buyers often buy when prices are rising, in fear of missing out on a rally. But often, the smarter move is to watch for short-term price reductions in a rising market and make your move then.
How do you know whether a price decline is short-term or marks a sustained price reversal? It helps to understand the underlying forces driving the price of an asset and whether those forces support a rally or have shifted to eroding one.
I’ve written a lot about the forces driving the current 17-month rally—which I believe will be sustained over the long term:
- strong central bank demand;
- geopolitical conflict;
- political instability in the United States and Europe;
- economic uncertainty in China and the United States;
- the strength or weakness of the dollar;
- worldwide private and government debt burdens, especially in China and the United States; and
- the apparent inability of gold miners to increase production.
Taken together, these forces are aligned to drive gold prices upward for the foreseeable future.
Analysts around the globe agree. Only two months into the year, they are already raising their year-end forecasts. Many now see gold breaking $3,000/oz., a gain of almost $400/oz. this year.
Other analysts are more optimistic. For example, on February 28, Goldman Sachs raised its year-end target to $3,100/oz. but also described a scenario that could take gold to $3,300/oz. this year. My forecast has been even more aggressive, targeting $3,500/oz. by December 31. That comes to a whopping $900/oz. increase for the year, leaving 2024’s historic rally in the dust.
Why do I feel justified in being so optimistic? Government debt burdens.
A lot of attention is given to U.S. government debt, but it's not just our debt. It’s corporate debt and China’s massive debt, too. Soon Europe will be rapidly increasing its debt burden to fund a more assertive defense posture against Russia and to stimulate its weak economies. This global, tidal surge of debt will drive interest rates higher and amplify central bank rate hikes to tame resurgent inflation.
But the most immediate threat to our economic well-being lies in the United States, where the House of Representatives has just passed a budget that would increase the debt by $6 trillion over the next 10 years, putting it in excess of $43 trillion.
Even $43 trillion is improbably low. It assumes that no wars, economic or financial crises, pandemics, or politically popular tax ideas lead Congress to increase spending or reduce income sometime in the next 10 years. What are the odds of that?
I recall that when I entered the Treasury Department in 1993, the debt stood at $4.4 trillion, eight times less than it is today.
This means that over the course of the nation’s entire 204-year history, through civil and world wars, depressions and pandemics, the nation had accumulated less debt than we would add in a decade under this budget.
When I left the U.S. Mint eight years later, the debt was only $1.2 trillion higher—and we were reducing it with an annual budget surplus.
While next year’s budget has been adopted by the U.S. House, the Senate still needs to act. If it greenlights a similar-sized deficit, which I expect, the consequences for the nation’s economy could be dire. And since the exceptionally strong U.S. economy is sustaining an otherwise marginal world economy, the fallout would be global.
As I’ve highlighted before, private and central banks in China and India are, by far, the world’s biggest gold markets. Economic, political, or geopolitical instability affecting those markets is likely to drive demand well above most analysts’ forecasts, which is why my expectations for gold are higher. Keep an eye on what Congress does with the budget and how skyrocketing debt affects the global economy.
