The price of gold briefly surpassed the $1,400 per ounce mark on Friday for the first time in a long while. Gold has been stuck in a somewhat narrow range for quite a while.
Every time the price shot above $1,300 and it seemed a new rally was coming, it would pull back again.
I don’t know if this time we will actually see a continued surge or if we will just see another pullback. While gold has been a great investment if you bought it at the turn of the century, it has been rather lackluster at best for the last 6 years or so. Mining stocks have been absolutely terrible to own for the last 6 or 7 years.
Of course, I don’t look at gold purely as an investment. Its number one goal is something of an insurance policy against disaster and especially terrible government policies.
When I do look at gold as an investment, I look at it in context with a bigger portfolio. I recommend a permanent portfolio, which includes 25% in gold assets. It is a form of diversification. It is a hedge against significant price inflation.
I have no problem with the idea of speculating in gold and gold-related investments, but it should be looked at as a speculation. You could make money or lose money. Mining stocks in particular are incredibly volatile. When a new bull market in gold finally emerges, I expect mining stocks to give incredible returns.
Two Events This Week
There were two major events this past week that coincided with the explosion in the dollar price of gold. One was Iran. The other was the Fed.
Regarding Iran, Trump and his war hawk advisors have been threatening Iran and making unproven accusations against it. They were quick to blame Iran when two oil tankers were attacked. They were also quick to blame Iran when an unmanned drone was shot down off the shores of Iran.
In regards to the oil tankers, we don’t really know what happened. It is possible that the Iranian government was responsible, but I doubt it. It is more likely a false flag. If it actually was a false flag attack, I have my doubts whether Trump actually knew about it. I am not sure just how much is kept a secret from him.
Still, I do not excuse Trump. He hired the horrible human beings that are Mike Pompeo and John Bolton. He pulled out of the Iran deal. He imposed sanctions on Iran. He has been making verbal threats.
In regards to the shooting down of the giant drone, the contention by the U.S. government is that it was in international air space. Iran says otherwise.
What would the narrative be if an Iranian drone were flying 20 miles offshore of Miami Beach? What if the U.S. government shot it down? Americans would be calling for an all-out war against Iran for daring to threaten the U.S. by flying a drone near our shores. Would anyone contend otherwise that this would be the reaction?
Although the U.S. may have come close this past week to starting an outright war with Iran, I don’t know if that contributed to the increase in the gold price. It certainly must have contributed to the increase in the price of oil.
If the U.S. had just dropped a few bombs on Iran, I don’t know what the response would have been (or will be). I don’t know if the Iranian government will just sit back and take it and hope that it stops. Or maybe they will fight back with their backs against the wall. They will certainly try to disrupt the oil market.
The market does not seem to be betting on a massive war with Iran. I think gold and oil would both be even higher at this point. Then again, sometimes the market is wrong. We can’t predict what Trump and his warmongering advisors will do.
The rise of gold also coincided with the latest Fed meeting. The Fed announced that it would keep its target interest rate the same for now. With that, you would think gold might go down.
But Jerome Powell said in a press conference that the Fed is willing to accommodate if necessary. Investors are betting on a rate decrease the next time around. This is in spite of the fact that the Fed is still reducing its balance sheet.
Still, the rise in gold really took off after the press conference by the Fed chair. I think this had a bigger pull on gold than did the news about Iran. Both stories probably contributed to the rise, but I think it was more the Fed.
The Gamechanger
The biggest short-term factor will be a recession. The inverted yield curve, at least as comparing the 10-year yield to the 3-month yield, is indicating a recession ahead. This will most likely occur in 2020.
A recession is typically not good for gold, especially if consumer price inflation is relatively low and expected to stay low. We may see a temporary pullback in consumer prices, which is actually what the American middle class desperately needs.
I believe the Fed will turn again to loose money. It won’t just be lower interest rates and possibly even moving towards negative interest rates as we’ve seen in Europe and Japan. There will be more quantitative easing (QE). In other words, the Fed will return to creating money out of thin air.
There will be a time to get further into gold and possibly gold-mining stocks. I am not going to say that we should go all-in. I never want to go all-in on anything.
I recommend a core holding of gold assets all the time. Maybe we’ll see gold prices run higher a bit before the recession hits. When the recession does hit, maybe the pullback will be less than normal. Cash is king in a recession. People want liquidity. It is also an opportunity to buy assets that are on sale.
Gold may see a sale price, but I don’t think it will last long. It certainly won’t last long if the Fed is as aggressive as it was the last time a deep recession hit.