Gold price Will Gold Prices Keep Going Up? | How The Fed Impacts Gold Prices
Gold has performed extraordinarily well. This year., It is certainly trouncing the stock market.. Even if you look at the the high flying NASDAQ, which, although it has retreated. A little bit over the past. Uh, maybe you can see the gold is, is clearly outperforming. And so in this video. I want to talk about why gold is out performing. Why it’s, why it’s performing so well, my thoughts on whether or not gold is going to continue to perform this well in the future and maybe give a bit of a historical perspective on how I think about how I think about gold and then finally. Well, for My opinions, you know I’m sure people are out there considering I’m considering buying gold, adding it to my adding that to their portfolio.. I know I certainly am thinking about that. And so I’ll offer my perspective on that at the end uh of the video., So let’s get right into it.. Why is gold Performing so well? I mean there’s a lot of different reasons, but if I was to try and distill it down into one word, it would be uncertainty. When uncertainty is high. People flood into gold people flood into hard assets.. If you don’t know what the future is going to look like, naturally, people get into this protectionist mode. And when you get into a protectionist mode, your goal is to preserve what you have. And so.. One of the consequences of that is people generally pour.
You know money into hard physical assets into things that are tangible things that they can see.. You know real estate is another good example, but gold is probably the best store. Now there’s, certainly other commodities that people invest in. That will serve a similar purpose like silver and platinum and other commodities. That’s not really going to be the subject of this video. Gold still remains the the King. In terms of serving this purpose., I think you know over. Long periods of time.. Certainly one of these other commodities could outperform golden bead.. You know some of them have over certain periods of time, but with gold. You know exactly what you’re getting. It’s far more liquid. The market for gold is much much bigger. There’s a lot of different ways that you can you can trade gold. And also it’s, going to be far less volatile than all of those other commodities.. So I think gold is still very much the King of this now. Let’s talk about let’s, get into a bit of the several different reasons beyond just saying that we’re in a very uncertain time, right now why gold has performed so well. The first reason for this is you’re, seeing the decline of the: U S: dollar, right, The! U S. Dollar has gone under a precipitous decline, pretty much since it peaked back in in late March. And there’s. Several different reasons for this as well.. The first is that when we think about currencies, we think about I’m in relation to some other thing.
. We another currency, you’ve, seen other currencies get stronger. Over the same period like the Euro., And so if the Euro is going up, then the dollars value relative to the Euro is going to go down. Now. The reason that the Euro has been uh been rallying recently is because of the massive uh stimulus package that was just passed by the European union.. One of the. Uh quirks of that well, was that the European union as an entity is going to start a debt. Self. That’s going to be denominated in euros., And this is like this is a big thing. That’s, going to strengthen the value of the Euro, because it puts a lot more faith in the Euro as as a currency.. If the European union, as an entity, is going to be issuing debt for the purpose of all of the European union member countries, it means that you know Fewer of them are going to be considering a sort of Brexit type deal, leaving the European union. If they’re Getting money from this from this debt offering., So it’s, certainly strengthen the Euro relative to the dollar to the dollar is going to. Going to decline. So that’s, the first thing.. The second thing is that central banks are pretty much are no longer flooding into the dollar.. Like they were in March as a sort of flight to safety right When the when the lockdowns shutdowns were just taking place, there was a whole lot of uncertainty.
. People wanted to raise dollars really quickly., And so they fled into them.. Central banks are starting to realize that that’s not really., Oh that’s, not really necessary. And so they’re no longer doing that.. You can see this on the Fed’s balance sheet.. You can see this decline in the uh foreign exchange swaps, which is the mechanism that the federal reserve and other central banks use to exchange dollars all around the globe.. But I think I did a whole separate., A video on that as well as you can go. Watch um watch that video.. I believe it was titled why the Fed’s balance sheet shrank and the big thing that the trunk was was the foreign exchange swaps., So that’s, another thing., And then third – and this is another thing I’ve talked about in this channel – is that the United States dollar status. As a reserve, currency is coming under threat. Right. One of the benefits of being a reserve currency is that there’s constant demand internationally for U S dollars, because international transactions are settled. Generally in? U S dollars certainly coming under threat by China by Russia by other countries that no longer to want to do this., And this is going to not only cause the decline. The dollar but it’s also going to directly drive up the price of. Of gold right You’re. Seeing central banks all around the world start to load up on gold, China and Russia are two perfectly good.
Examples. They’re loading up on on gold., And so this not only is going to weaken the dollar but also directly impact the value of because there’s, more demand coming from those central banks., So that’s. The first thing. Second thing is that bond yields have completely collapsed.. I think, on a real adjusted basis, bond yields are basically negative at this point., And so nobody wants hold bonds., And so, if you’re, an investor like a pension fund or an endowment or some other. Um, some other, I guess like real money, lower risk. You know wealth manager, you’re going to have to look for for new investments. In order to preserve that wealth., I mean a lot of a lot of wealth management companies that trade primarily in the bond market are more concerned about preservation of wealth, and you know, Sort of gradual growth over time and they’re, not getting that in the fixed income. Market. They’re not getting that in the treasury market, because on a real adjusted basis, the yields are negative, which means when you adjust your returns for these fixed income instruments. Like a you know: a 10 year treasury bond. Yeah., You might make. Whatever it is. 70 basis points on it. You know inflation is going to be higher than that., So you’re really not going to come out ahead., And so one of the things that they’re going to do is they’re naturally going to want to get into gold because it will serve a similar purpose.
But hopefully you know on a real adjusted basis: gold, won’t, uh won’t have a negative yield. I guess. And so that’s. The second thing that’s happening. Now let’s pivot in and talk about how I think about the value of gold and whether or not gold is going to continue to go up through time. Um. A lot of people like to to the supply of money, something that could act as an indicator to whether or not gold is going to continue to rise in the future.. But unfortunately, this correlation really breaks down over extended period of periods of time.. I mean there have been periods. Like the past 10 years, where this correlation has been very strong, as the fed starts to print more money at a more rapid rate, you would expect the price of gold to go up, and indeed, over the past 10 years, it Has., But if you look over a very very long period of time, you see this correlation start to break down. And so it’s, honestly, not that great of an indicator, a better. Indicator that I found her.. Unfortunately, this is not a hard. You know quantitative thing., You can’t possibly quantify this, but you can clearly make the argument that faith in the central banking system, faith in the federal reserve is deeply correlated with the price of gold.. If people don’t have any faith in the federal reserve, don’t have any faith in the currency system. They’re going to they’re going to buy gold.
. If people have a lot of faith. In the federal government have a lot of faith in the currency system. They’re not going to have a need for gold. They’re going to be perfectly comfortable owning dollars.. I mean look at this historical chart over the past. What 50 years it begins with Nixon, ending dollar convert ability to gold., And then you had this massive. Decade, long period of extraordinarily high, almost runaway inflation and people had absolutely no faith, the central banks, because the central banks weren’t doing anything about it.. Meanwhile, not only did you have extraordinarily high inflation, but you also had rising unemployment., So not only were people’s purchasing power getting eroded, but they were also losing their job altogether, so they didn’t have any income.. So it was very, very little. Faith in the central bank. And you saw the price of gold. I think go up like 20 X. It was one of the most extreme ordinary, extraordinary long and powerful bull markets for gold. And then what happened? 1979, Paul Volcker gets in and the fed decides to fight inflation by hiking interest rates. Incredibly, high. Interest rates started to come under control., Then Alan Greenspan got in there and Alan Greenspan went through what was known as the great moderation period., And during that period people had tremendous faith in the federal reserve. Had tremendous faith in the three system in Greenspan was in there for like two decades., He was in there for an incredibly long time, across.
, I believe three different presidents Reagan, Clinton and Bush on both sides of the aisle., So that just goes to show you the The level of faith that people had in the federal reserve in in the in in the um, you know, faith in in the: U S: dollar and the currency system.. No indeed.! You saw gold prices collapse.. They reached a peak of a believer like 850 bucks and they collapsed down to like I dunno 300. And so it’s like a 70 decline. And then what happened then in the mid to late 2002, you had the housing bubble. You had the great recession.. You had interest rates, lower, does zero., You had. You know at the time time unprecedented levels of quantitative, easy and then you had to cap it all off in 2000 and you had the European debt crisis and you had America’s sovereign debt get get downgraded. And so obviously absolutely no faith in the federal reserve. At that point. And then gold prices spiked., I think, like 800, they went from like you know, two or 300 bucks all the way up to a peak of 1900, an ounce., And I think we’re, probably going to break that very, very soon. And so we’ve, essentially Wobbled around over the past decade., You know there’s a bit more faith as as we started to wind down a lot of the programs that were implemented post 2008, 2009, but now obviously.. I think we’re entering into the next big period of great uncertainty and lack of faith in the fed.
. I think a lot of people are sort of questioning what the fed is doing right, now. Again unprecedented level of monetary stimulus, unprecedented level of of printing money.. You know we’re buying junk bonds. We’re talking about negative interest. We’re talking about yield curve. Control., Like all of this, is going to erode. Faith in the central government and the earth in the central bank rather., And then if inflation starts to pick up down the road and anybody that follows this channel knows what my beliefs are on that.. I think that inflation is going to start to pick up once the economy starts to reopen and get back get back to work. Well then, you’re going to have a period that that I think is going to closely resemble what happened. In the 1970s you’re going to have. I mean we obviously have incredibly high unemployment right now, which was a characteristic of the 1970s. And then the other side of that equation was inflation., And so if inflation picks up and we remained to have high unemployment. Well, then, you have a stagflation, period. That’s, going to resemble the 1970s and obviously gold very well over that 10 year, long period.. So I guess the final question as well is that is gold, something you should buy? Is it something that you should put into your portfolio? I think the answer to that lies. In.. Your intention for owning gold in your portfolio like gold is, is unique and that you can buy it with with several different intentions right.
You can buy it strictly. As an investment., You can buy it because you think that you are going to be able to sell it down the road at a better price right in if that’s, your goal.. If you want to buy gold as an investment, you essentially have to believe that it’s going to outperform. Any other asset class that you could go and invest that money. Right.. When I think about investing, I don’t think about it. As did I make money, or did I lose money I think about it as an opportunity cost right. If I buy a stock and a year later, it’s up 3.. You know yeah. I’ve made money, but if the stock market as a whole is up 20, I didn’t really perform that. Well that year. Right., Because I could have just bought the bought S and P 500 fund and have it go up 20.. These are all hypothetical numbers by the way., But, like you see my point. And so it’s the same thing with gold, you know it’s not really enough. If you’re going to buy it as an investment it’s, not enough to say. It’s going to go up., You have to be able to say okay. Is it going to go up more than whatever else I could put my money in, And this is okay.. I think what’s happening with the bond investors right now is they’re saying: why would we own? Why would we own bonds that are that are negative, yielding when we can get it to golden, perhaps get a higher yield over a period of time.
? And so for me, the question is: is it going to outperform the stock market And indeed it has. Over the past? You know at least this year in 2020, it’s completely trounced uh, the stock market. And so trying to wrap my head around whether or not that’s going to be the case in the future.. I think that that if inflation really starts to pick up like, I think it will, then it certainly could.. It certainly could continue to outperform the stock market.. Unfortunately, it’s hard to project what’s going to happen that far out, because we’re still very much in a. Disinflationary period. Right, Because the economy is still close. And so let’s let’s get into the second part of this equation is the people that want to buy gold as A hedge against inflation. That’s, really the other big reason why you would buy it., And I think that if that’s your, if that’s your goal is a strict inflation, hedge it’s, certainly a very good one.. Gold is one of the best hedges against inflation. But I think you’re probably going to be a little bit early to that. Trade. And the reason is because although. Evidence suggests that we’re going to have inflation far enough down the road.. I don’t know how far that’s going to be. And we’re, certainly still in a period right now, where we have incredibly low inflation., I mean you’re, never you’re, never going to get inflation as long as large percentages of people and the economy are closed.
. If people aren’t going out and spending money, if people you know Aren’t moving money around in the system., You’re not going to get inflation., And indeed, if you look at break, even inflation, which is a market implied value of what inflation is going to be in the Future, you can see it’s only about 1.5, which is below the Fed’s, 2 target., And so we’re not really there yet., And so I think that if you’re going to buy it as an inflation, hedge Seattle certainly certainly a very good one.. I just think that you’re probably going to be early to that trade, because I don’t know when inflation is going to pick up., And so these are sort of the things I’m still grappling with what I consider.. You know adding gold to my portfolio and whether or not it’s going to be uh going to be a considerable considerable portion of of my portfolio but as always love to hear what you guys have to think. I’m sure some of you already own some gold.. Are you thinking about? You know investing in gold? Please leave your feedback in the comment. Section below. Excuse me. Um. Otherwise you know if you liked this video you can like the video subscribe.