The King of Currencies
Gold has rallied through every level seen against fiat currencies. The last remaining levels just two weeks ago were $1,921 and ¥205k. We are trading well above them now.
What next? Instead of shooting in the dark as the uptrend pushes forward, or rather the downtrends in fiat currencies proceeds, here are two targets that can be derived, one short term and one long term.
- Below is a chart of Gold versus US Long Bond. It is NOT yet at an all-time high. The high was set in 2011 at 13.30. We are currently trading at 11.21. Given the lack of volatility at this stage in Bonds, if we assume that the T-Bond will remain somewhere around today’s price of 182 for some time (few months or into year-end) and expect the all time high of 13.30 to be tested it would give a Gold price target of close to $2,400. The important level though is 13.30 on the ratio.
- The long-term projection is something that has been reported on before – looking at the behaviour of Gold after the Lehman crisis. Gold hit a low in October 2008 at $682 after Lehman Brothers collapsed and then moved up to trade a notable high of $1,921 in September 2011, almost exactly 3 years later. That was a rally of 180%. A similar extrapolation from the March 2020 low following the Covid-19 panic at $1,451 would give a target of close to $4,000 over the 2 ½ years
There should be no doubt that the world’s major central banks are effectively debasing their paper in what is a Currency War. Some will go further than others, the suspicion being that the most aggressive will continue to be the Federal Reserve and US authorities. That is why the USD is falling. With Europe turning a corner last month, Euro strength at some stage will likely turn into a problem, but that is for later.
What is clear still is that the crown rests on Gold and precious metals.
SKA
2 comments
Shyam, what would happen if people go away from dollar or long term fixed income, and that drives interest rates very high? What would happen to gold then? Would higher interest rates bring gold down? With higher interest rates, the value of everything goes down, and maybe gold too, and people can move to short term fixed income, or medium term fixed income at much higher rates, or the stock market at depressed levels? …?
The answer to this would depend on the ‘why’? It seems from the wording of your question that if yields rise because US Treasuries, assets, and the USD are effectively abandoned (very unlikely) then something like Gold would hold up and do very well. Such a scenario would be a total lack of confidence in the Federal Reserve System. However what we seem to be seeing is diversification away from the USD within fiat currencies to the likes of the EUR which has done well ever since they moved towards creating a supranational fund this year.
Also be careful with the apparent relationship between Gold and Bonds. They are correlated today and have been for some 18 months but they are not always. Even when long end yields rose in the first half of 2009 and the second half of 2010, Gold remained in a bull trend, partly because the USD was in a downtrend but also because of Central Bank balance sheet expansion.