Central Banks: Gold’s Greatest Ally

Central Banks: Gold’s Greatest Ally BY  for Daily Reckoning

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You’re likely aware of the price action in gold lately. Gold has rallied from $1,591 per ounce on April 1 to $1,907 per ounce as of today. That’s almost a 20% gain in a little over six months, even with selloffs along the way.

Today’s price of $1,907 per ounce is nearly double the low of $1,050 per ounce at the end of the last bear market in December 2015. That’s highly impressive, but it’s only the beginning.

The history of gold bull markets (1971–80 and 1999–2011) shows that the most powerful gains come toward the end of the bull market, not at the beginning.

That means even if you’ve missed out on the gold rally so far, you could still score huge gains as gold trends toward $10,000 per ounce or higher over the next four years.

$14,000 gold is entirely possible by 2026. How?

If we simply average the performance of the past two bull markets and extend the new bull market on that basis, we would expect to see prices peak at $14,000 per ounce by 2026.

As I’ve stated on multiple occasions, I didn’t just come up with these numbers out of the blue or to be controversial.

They’re simply the implied non deflationary price of gold based on the M1 money supply and assuming it will have a 40% gold backing.

What’s driving this bull market in gold?

It’s not retail investors (apart from a small number who understand the dynamics), and it’s not institutional investors (institutional portfolio allocations to gold are typically about 1–2%).

Instead, the steady buying is coming from central banks (especially Russia and China) and from the super-rich, who typically store their gold in private non-bank vaults in Switzerland and other good, rule-of-law jurisdictions.

The drive toward larger portfolio allocations to gold (in some cases up to 10%) is coming not just from the rich themselves but from their wealth managers and portfolio advisers.

This is a sea change.

For decades, wealth managers have rejected gold and pushed their clients into stocks, corporate credit and alternative investments, including private equity. All of those portfolio allocations backfired when the coronavirus came along. Equity markets have since recovered, due in no small part to massive intervention by the Fed.

The Fed doesn’t entirely explain the rally, but it’s certainly played a critical part. The market is nonetheless set up for another fall. The upcoming election is just one catalyst.

Not only will uncertainty reign until Election Day. It will continue to reign afterElection Day.

If Trump wins, the Resistance will not take it well. They will challenge the outcome in court, deny the legitimacy of a Trump victory, and extreme elements in the Resistance will burn American cities.

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