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Three Reasons Gold Will Rise from Its Slumber

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The price of gold has languished in recent weeks. After falling below $1,300 in May, the yellow metal has hit 2018 lows this month. Dollar strength along with the anticipation of further Federal Reserve rate hikes have bolstered the dollar and weighed on gold.

Peter Schiff has been saying this dollar strength is merely an upward correction in a bear market. Peter’s not alone in this view. Some mainstream analysts have even acknowledged the dollar surge is likely temporary.

So what about the gold market? Should we just give up on it? Well, as we’ve pointed out, fundamentals point to an overall healthy market for the yellow metal. And we’re not alone in our thinking. An article in the Economic Times of India points out three reasons gold will likely come out of its slumber. Interestingly, we’ve touched on all three of the factors this article mentions. 

1. Rising Inflation

The first factor the Economic Times brings up is rising inflation. US inflation is already at the highest point in six years.

Then there’s this:

The five-year real yield is at 0.74%  as seen from the chart, and is constantly rising. This is the indication that inflation expectations are rising and five-year TIPS (Inflation protected securities) are getting more expensive versus a nominal treasury.”

As we have pointed out, rising inflation is good for gold.

2. Trade Wars

Peter Schiff has talked extensively about the trade war, arguing that it could prick the US bubble economy. He’s also pointed out that contrary to what some of the mainstream pundits say, a trade war is not good for the dollar. The ET points out another potential consequence of the trade war.

The potential of trade war is increasing and now the US is taking on the G7. It is already at the loggerheads with China, and is now ruffling the feathers of its allies — Canada, Mexico and the European Union. In response, retaliations have started against agri producers in the US. We may see tit-for-tat from other countries, which will eventually lead to the trade war and distort prices around the world (again which will increase inflation).

3. Mounting US Debt

We’ve hit on this theme over and over again. All of this debt with rising interest rates create a nightmare scenario. A report came out last month revealing that at the current trajectory, the cost of paying the annual interest on the US debt will equal the annual cost of Social Security within 30 years.

The ET says the mounting debt and increasing deficits have already started turning a number of countries including Russia, China and Turkey against the dollar. They are in the process of decreasing their exposure to the greenback and buying gold.

International sentiment has already started to turn against the US Dollar. Russia, China, Turkey and other emerging markets have started accumulating physical gold. At present, gold is the only assets where financial managers are not bullish. Equity class even debt class such as bonds are doing quite well despite increasing interest rate. We would like to take contrarian call as at some point investors will start realising the true value of gold based on demand and supply and not suppressed by derivatives.

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