The prevailing mantra on Wall Street is that gold’s bull market is now over and it’s time to bury precious metals as an investment theme for the indefinite future. Their rational is based on the belief that many investors held misguided fears during the credit crisis about a breakout of massive inflation and economic chaos, which drove gold to nearly $2,000 per ounce. Of course, (the perma-bulls claim) those worries have now completely failed to materialize and will never be a genuine risk in the future.
This argument is blatantly false because it assumes that the final chapter has been written on the Great Recession and debt crisis that paralyzed the entire globe back in 2008. The truth is the most pernicious effects of the devastating economic collapse that began five years ago has been merely held in abeyance due to record low interest rates and an aggressive expansion of central bank assets; which is being used to boost real estate values, equity prices and the economy.
For the crisis to truly be declared over, the Fed would have to raise the overnight lending rate to near 6%, while selling nearly $3 trillion worth of MBS and Treasuries. Then, if the real estate and equity markets can withstand interest rate normalization and the paring down of the Fed’s balance sheet to a sustainable level, we will be able to finally give the all clear signal. However, if the now record $54 trillion in total U.S. debt cannot be serviced under a normal interest rate regime, investors will know nothing has been resolved. And, since the progenitors of inflation are; massive debt levels (especially on the government level), artificially-low interest rates and an ever-expanding central bank balance sheet, it is far too early to declare a victory over inflation.
The Fed is aware it cannot ever allow interest rates to significantly rise without destroying housing, stocks and the economy. Therefore, this dangerous cocktail of low interest rates, continuous and massive money creation from the Fed and intractable government debt will be in place for a very long time. Unfortunately, those factors taken together will eventual bring to fruition runaway inflation and economic chaos that the perma-bull crowd on Wall Street and Washington have summarily declared vanquished.
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Once investors become aware that the economy has become completely addicted to the provisions of perpetually low interest rates and central bank asset purchases, the gold market will then resume another leg higher in its secular bull market and eclipse its all-time record high soon thereafter.
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