Will gold ever rally again?
I know, gold feels like it’s going nowhere in a hurry.
I mean, it’s still at the same price it was three months ago in late July. And you’re asking yourself, “Will it ever rally again?”
If that’s what you’re thinking, you may need to arm yourself with a little more patience.
Yes, gold is in a bull market. Yes, all the fundamental reasons for it to keep rising are still in place. Yes, gold’s going to the moon. It’s just not going there overnight.
Although gold’s not gaining any real traction right now, it will soon.
I’ll show you why, and when it might.
Through Election Cycles and Exploding Balance Sheets
In the past 40 years, when Democrats won, gold softened for about 1 month after the election, then rose. When the Republicans won, gold moved sideways then dropped markedly three months later, before starting to recuperate.
The U.S. election is just two weeks away, and there’s still no stimulus package. The White House is proposing $1.8 trillion, while the Democrats want $2.2 trillion.
At the risk of alienating some voters, the Democrats are reticent towards doing a deal that could help Trump get re-elected.
Even if a deal were to get done before the election, I don’t think another round of stimulus checks would be part of it. If that comes, it will likely only come later.
But more money will flow, and that’s why gold will rally.
As the above chart shows, whoever sits in the oval office, the markets are likely to head higher next year. I’m betting that’s going to be a continuation of the current “Melt Up” fueled by ongoing low interest rates, stimulus and money printing.
The Fed’s balance sheet is now seven times the size it was before the 2008 financial crisis.
In the last year alone, it has gone from $3.75 trillion to $7 trillion. That’s a great reason to own gold.
Billionaire investor Leon Cooperman agrees. Speaking to RealVision recently, he said, “I bought gold for the first time in my life a week ago. I understand the case for gold. We’re on the way to some banana republic situation. Nobody’s worrying about the debt that’s being created.”
On a fundamental basis, gold has all the ingredients to head higher.
Gold Is Still A Bargain
Here are a couple of other metrics showing why gold outlook remains strong.
As energy represents about 50% of the cost of production, it’s useful to examine the gold/oil ratio on a long-term basis.
Other than the major collapse in oil prices this past April, the ratio has been steadily increasing over the past decade. That means gold mining remains very profitable, a trend that’s likely to continue for some time.
Pierre Lassonde, co-founder of Franco-Nevada, told Kitco News recently that “gold miners never had it so good,” saying as well that “margins they are producing are the fattest, the best, the absolute unbelievable margins they’ve ever had.”
Now look at gold versus the Dow Jones Industrial Average going back to 1970.
Even gold’s $1,900 peak in 2011 is hardly a blip compared to gold’s $800 peak in 1980. That’s why I believe gold still has much, much, much higher to go before topping.
Since peaking in August, gold’s been trending downwards to sideways as it waits for a catalyst to emerge.
Meanwhile, the RSI has been drifting mostly sideways as the 50-day moving average has rolled over, and gold remains below that level.
Right now my sense is that gold’s likely to start moving only after the election. I think the two most likely catalysts are some sort of election chaos/extended uncertainty, or the next major stimulus package.
That’s something we can expect no matter who’s sitting in the oval office.
Stay long gold, and buy the dips. Don’t worry…gold’s going up.
Peter Krauth is a former portfolio adviser and a 20-year veteran of the resource market, with special expertise in energy, metals and mining stocks. He has been editor of a widely circulated resource newsletter, and contributed numerous articles to Kitco.com, BNN Bloomberg and the Financial Post. Krauth holds a Master of Business Administration from McGill University and is headquartered in resource-rich Canada.