Prices of securities and other financial instruments are falling due to the current economic and sociopolitical climate around the world. Investors are confused about where to place their money in light of the extreme inflation that the world’s economies are currently experiencing, one that hasn’t been seen in more than 30 years.
The Dollar
The United States government abandoned or rather collapsed the Bretton Woods agreement to make their currency the benchmark currency in 1971. This action by then President Nixon devalued the Dollar but turned it into the global financial power that it is today, as most economies float against the dollar and it is used as the world’s reserve currency.
The Dollar is currently trading at levels not seen in 20 years, as rising rates offer bigger returns, making the Dollar a safe haven asset for investors.
This has a drawback in that as foreign money enters the American system, it imports inflation into the economy. In 1977, when the US national debt reached 34% of GDP and inflation was 6.5 percent, the world’s central banks met to rescue the dollar. So they started buying US government debt at a moment when most economists would term it an unending purchase. The financial crisis was averted, albeit at a high cost to the economy. Since then, the G-7 central banks have purchased or created more than $25 trillion in government bonds to solve emergencies, including pandemic stimulus, and to avoid another slump. Yet debt has been made monetizable.
As of now, the federal debt is 130% of GDP, up from one-third of GDP in 2008. Inflation in the United States is at a 40-year high, as America continues to run a deficit and the Federal Reserve continues to print money to pay government expenditures.
In order to manage inflation, the Fed must boost interest rates. Raising interest rates harms the economy by causing asset values to fall below their face value, leaving investors panicked and fearful. The once-great financial power has found herself in a quandary as interest rate rises can harm her economy while attracting foreign cash. As the United States continues to monetize its national obligations, inflation will rise. The demise of the US dollar as the world’s reserve currency is inevitable. As a result, most investors’ safe haven prompts the question, “Is the dollar genuinely safe?”
Gold; The viable alternative to the US dollar.
In the last 20 years, gold’s price has risen dramatically from around $400 per ounce to over $2,000 per ounce. In times of uncertainty and panic, gold has proven to be a safe haven. It is long-lasting and cannot be conjured out of thin air, like the US dollar can.
Gold is THE HEDGE. In an uncertain economic environment, central banks throughout the world would turn to gold as a hedge. Gold has historically performed well during periods of turmoil, but its recent performance has been disappointing. As a result of its poor performance, investors sold over $2 billion worth of ETFs in June alone.
However, when interest rates are high, as they were in the 1970s when the Fed hiked rates from 3.75 percent to 13 percent, gold prices skyrocketed from $30 to over $200 per ounce. Rates soared from 4.75 percent to more than 20 percent in 1977, while gold rose from $140 per ounce to a record high of $870 per ounce. During the 2001–2011 bull market, gold reached $1900 per ounce. During the COVID epidemic, gold reached an all-time high of $2200/oz. This demonstrates that gold has always outperformed its prior peak during economic downturns.
As gold’s recent performance hasn’t been promising, it has remained solid in a range while other asset classes have plummeted. The S&P 500 has dropped more than 20% from its peak last year, cryptocurrency markets have down more than 75%, and bond prices have fallen over 20%.
10-Year Treasury note
Gold Price Prediction
Gold is now consolidating, or in what I term an accumulation period. This is where most trading and price engineering takes place. The accumulation range is the point at which most institutions and central banks price in their orders. The engineering of liquidity, i.e. buyside or sell side liquidity, is a key feature of the range. When price breaks through one of these liquidity thresholds, it moves to the opposite side to disperse the orders.
Gold ideal entry prices with entry prices in brackets, Gold is currently at a buy zone.
The .62, .705, and .79 Fibonacci levels are my ideal discount prices for gold. Price projection for Gold with projected prices in brackets
The chart above shows the Fibonacci price projections for gold at -1, -2, -.62, and -.272. From the optimum entry level of 0.705 Fibonacci level to the -2 price estimate, gold has appreciated by 97.55 percent. Gold is projected to return to its former all-time high of $2000/ounce in the near future. The bull market on this fine mineral just begun.
