The Biggest Reason Gold Will Hit $1,500

Written by Jason Simpkins
Posted September 8, 2017

Gold has already surprised a lot of people this year. And it’s going to keep surprising.

In fact, investors, analysts, and observers are going to be amazed at how quickly gold returns to $1,500 per ounce.

Currently trading at it's highest point in a year (north of $1,352 per ounce), gold is up 2.5% in just the past week, and 18% year-to-date.

Last week, I talked about some of the uncertainty that’s driving prices higher. And shockingly, nothing has changed in the past seven days.

Washington D.C. is still a hotbed of dysfunction. Fringe groups are still trading blows in the streets. Russia and North Korea remain belligerent and antagonistic. Terrorism remains an omnipresent threat to security. And natural disasters abound.

Gold is destined to rise under these circumstances.

But there’s something else, too. There’s something a little more technical that’s boosting gold prices higher, and it’s probably the biggest factor of all.

It has to do with monetary policy.

You see, there’s a myth out there that many investors have bought into. And it’s holding them back from making money.

The basic premise of this falsehood is that the dollar strengthens in periods of monetary tightening. Or basically, that the dollar rises along with interest rates. And since we’ve been in a period of monetary tightening (allegedly anyway), the expectation has been for the dollar to rise and gold to fall.

Well, considering we've seen the exact opposite taking place, this is obviously false.

So here’s the truth…

The Fed Can’t Save the Dollar

Like many myths, the one about the dollar and interest rates has some basis in truth.

It is true that by raising rates the Fed can strengthen the dollar.

The example everyone loves to point to is Paul Volcker, who chaired the Federal Reserve from 1979 to 1987.

The federal funds rate averaged 11.2% in 1979, and Volcker raised it to a peak of 20% in June 1981. As a result, inflation, which peaked at 14.8% in March 1980, fell below 3% by 1983.

But take a closer look at those numbers. Volcker and the Fed jacked interest rates by 9% in just 23 months.

By comparison, in the current monetary tightening cycle, it's taken two years for rates to climb just 1%.

The Fed issued its first rate increase back in December 2015 — a negligible lift from 0-0.25% to 0.25%-0.5%. It’s raised rates three times since then to their current level of 1%-1.25%.

At this pace, interest rates won’t hit 4% until 2023.

And yet, people are still surprised that gold prices have managed to defy this wild period of monetary tightening.

But again, they shouldn’t be, especially considering historical precedent.

Indeed, historically speaking, the dollar actually underperforms in most periods of monetary tightening.

Look at the last two monetary tightening periods — in February 1994 and June 2004 — and you’ll see a nearly identical pattern.

In both those cases, the dollar strengthened before the first rate hike, but then weakened by around 8% over the next six months. The dollar index then remained consistently below its level on the day of the first rate hike for the next two to three years.

You’ll also note, in those instances, gold prices went higher.

Gold more than doubled from 2004 to 2008, shooting from $400 per ounce to nearly $1,000 per ounce.

What all this data and historical precedent says, basically, is that the market tends to overestimate the effect monetary tightening has on the dollar, and thus on gold.

That leads to an unsubstantiated strengthening of the former and an unjustifiable weakening of the latter.

That’s exactly what we’re seeing now.

Here’s what the dollar has done so far this year…

Dollar 9%2F17
It’s down about 10%.

And at their last meeting, FOMC members came out more cautious and less inclined toward future rate hikes. So don’t expect a rebound any time soon.

Eventually the Fed will resume its rate hikes, and the dollar will bounce back. But ultimately, future hikes won’t be drastic enough, or come quickly enough, to sustain any real strength in the dollar down the road. And they definitely won't be enough to keep gold down.

Gold will continue its march higher in the months and years ahead.

And we’ll be at $1,500 per ounce sooner than most analysts think.

Fight on,

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Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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