Here’s Why Gold Prices Are Setting Up to Skyrocket
Look at fundamentals. They suggest gold prices are setting up to reward investors big time. Think long-term and ignore the negativity towards the precious metal.
There are three things investors should keep in mind when looking at gold prices: global government debt, derivatives at banks around the world, and complacency among investors.
Global Government Debt
You see, governments around the world are spending money without remorse and raking up their national debt. The U.S. government’s debt, for example, has ballooned to over $19.5 trillion, and with only budget deficits projected for the next 10 years, it could get much bigger. $30.0 trillion isn’t out of the question sooner than later.
But the U.S. government isn’t the only one. Look at any major country, and chances are its government is spending—and it probably has more debt than its gross domestic product (GDP).
Why does the government debt matter for gold prices? As governments increase their debt, it impacts the value of their currency. Higher debt leads to a lower currency value. And this is great for gold.
As a currency devalues, investors look to preserve their wealth. Gold does a great job at this.
Derivatives at Banks Around the World
One would assume that the financial crisis of 2008–2009 was a good lesson for the banks. Maybe it taught them not to take on risky bets. Sadly, as we see it, not much was learned. We see banks to be more leveraged now than they were back in 2007 and 2008.
One of the things we are paying attention to is the amount of derivatives they have on their books.
Consider this: in the first quarter of 2016, the top 25 banks in the U.S. had derivatives with a notional value of over $185 trillion! Mind you, these figure is from the U.S. only and this figure is much higher on a global scale. (Source: “Quarterly Report on Bank Derivatives Activities,” U.S. Office of the Comptroller of the Currency, last accessed September 22, 2016.)
Now, you really have to ask what could happen as the Federal Reserve is adamant that it wants to raise the interest rates while almost every other major central bank is looking to keep their interest rates low.
This disparity could cause problems across the globe. Dear reader, just a few of these derivatives going bad could do massive damage. We could actually have another financial crisis as hand if that happens.
Understand that gold prices do well in times when there’s a financial crisis and significant uncertainty. If you recall, after the financial crisis of 2008–2009, gold prices showed solid performance for the next few years.
Complacency Among Investors
Over the past several years, investors have gotten used to one trade: stocks and bonds. This is all due to highly accommodative monetary policies implemented by the central banks around the world. Stocks and bonds have surged in value and currently trade at dangerous levels.
Investors continue to believe that the stock market will continue to surge and that holding bonds doesn’t possess any risk.
Beware of this complacency. Faced with slight losses, these overly optimistic investors could be running for the exit and seeking safety. Gold does that, and in the midst of this occurrence, gold prices could skyrocket.
Long-Term Gold Prices Outlook
I have said this many times before, and I will say it again: if you are not looking at gold now, you could be making a big mistake.
The yellow shiny metal is trading at a significantly low price. In the next few years, it could be worth much more. Gold prices hitting $2,500+ is a real possibility within the next few years.
With all this, pay attention to mining shares as well. They are still trading at significantly low valuations and could generate massive returns as gold prices move to the upside.