With gold surging above $1,300 an ounce, this article discusses five reasons to remain bullish on gold not just for the near-term, but for the next decade. I have maintained my bullish stance on gold for long and these reasons serve as a recap for considering exposure to gold even at current levels.
Reason One - Central Banks Buying Gold Aggressively
Central banks have been aggressively buying gold in the recent past and I expect this trend to sustain. In particular, China and Russia are mopping-up gold as a part of their currency diversification. I had written on “Why Central Banks Will Continue To Buy Gold” and this factor will continue to drive gold purchase by central bankers.
Reason Two – Government Bonds With Negative Yields Surges
As of March 2016, 51% of sovereign debt was trading with negative real yields with another 33% trading at yields that are between 0% and 1%. While government bonds are safe assets, investors would certainly not want negative returns and the implication is that investors will gradually move to safer assets like gold in an environment where real interest rate is trending lower and creating incremental demand for gold.
Reason Thee – Surging Government Debt
The federal debt was $18 trillion as of 2015 and the CBO expects that deficits over the next 10-years will be $10 trillion. With surging government debt and rising debt servicing cost, I expect continued money printing in the next decade and this will ensure that the momentum for gold remains bullish. Besides the government debt, global debt as of 3Q15 was $153 trillion and swelling debt is favourable for gold also considering the point that another financial crisis is likely few years down the line.
Reason Four – Dollar Value Erosion And Diminishing Impact Of Debt
During the period 1980 to 2015, the dollar has lost 65% of its value and it’s entirely likely that dollar value erosion will continue as federal debt swells in the coming decade. A weak dollar is positive for gold and I must mention here that all currencies are likely to lose value against gold in the coming decade. I mentioned above that federal debt has been surging along with non-financial debt. Another big issue is that debt is increasingly having a lesser impact on real GDP growth. As the impact of new debt on GDP continues to decline, gold will trend higher through inflationary environment even in a weak economic scenario.
Reason Five – Geo-Political Tensions
In my view, geo-political tensions are likely to escalate globally and this will create demand for gold. Evidences from the past make it clear that gold performs well in times of higher geo-political tensions, inflation and uncertain economic growth. Currently, all these factors are combining to boost the outlook for gold in the near-term as well as the long-term.