Week 16: Geo-politicial uncertainty sets the stage for an exciting year for gold


Week 16


Global political tensions are reaching all-time highs, not seen since 9/11 when gold prices jumped 33% in a single day, creating a potentially explosive investment environment for gold, which offers a hedge against chaos and uncertainty.

Current market conditions have created a disconnect between relatively stable gold prices over the past year as against a mixed result for many of the world’s publicly traded mining and exploration stocks, with a vast majority remaining exceptionally cheap. This has resulted in a wide array of excellent gold plays up for grabs and when this is viewed against an unpredictable and inflation bent Trump, uncertainty over Brexit and its ramifications for the European Union, China’s economic road blocks and an increasingly volatile North Korea, you have a situation in which gold is set to once again trade at a significant premium.
Gold is the ultimate safe-haven and the ultimate means of payment when all else fails, or when the uncertainty is high enough to fear this failure. The transition is where fortunes are made and the turning point in this story is rapidly building momentum.

Whilst gold has come off highs achieved in the post-Global Financial Crisis of 2008, Americans are now once again buying gold like never before, in fact U.S demand for gold bars and coins was up over 200% during the latter part of 2016.

According to the World Gold Council, this surging demand signals a level of interest in gold investment “not seen since the global  financial crisis”.

Gold is being rendered even more attractive for Americans amid economic uncertainty most succinctly expressed by billionaire investor Warren Buffett, of Berkshire Hathaway Inc. (BRK.A), who noted that the U.S. is “less well equipped to handle a  financial crisis today than we were in 2008”.
Central Banks the world over have also been stockpiling the precious metal since 2008, at levels not seen since before 1970.

Still, gold has been volatile recently, after achieving a respectable 10% gain throughout much of 2016, it started 2017 with a bang as it rallied close to 20% to approach $1,300, and more recently it has fallen back below the mid-$1,200 level, as the broader resource sector rally lost steam.

Most miners view current price levels as a solid price and one which will re-ignite interest into the sector… but it’s only the beginning of a new era.

What comes next is what makes billionaires, because gold stocks are cheap while the fundamentals behinds those stocks are fantastic. Even the larger gold plays are predominantly trading at less than 10 times cash ow from operations per share.

Even with the modest recovery in prices this year, we have witnessed many gold stocks exploding higher, with many tripling and quadrupling in value over the past year, so imagine what will happen when Trumps inflationary policies set in, and global political uncertainty continues to rise.

Whilst the US Elections have undoubtedly increased volatility and caused much confusion, the verdict is that Trump will be good for gold in two very specific ways.

Gold loves it. More to the point, Trump’s build, build & build infrastructure plans and ambitious defense spending visions are phenomenally inflationary. But it is also possible that these policies will not lead to any long-term sustainable growth, which would in turn lead to stagflation, which is an even better friend to gold.

Gold prices feed on risk, and there will be plenty of it. Even just a change in government creates geopolitical uncertainty, but in this case the situation is more extreme. Trump has indicated he will take an aggressive stance on issues central to West Asia, and in general, we’re looking at a world in which the U.S. may meddle much less and cooperate much less.

The power vacuums that ensue are where the uncertainty lies. From the victory of a very divisive U.S. president and the rise of right-wing parties in Europe, to Brexit, China’s economic challenges and North Korea and Russia’s warmongering, this is the uncertainty that gold loves. Gold is always put on a premium pedestal in times of geopolitical uncertainty, even when it’s not chaos.

Right now, gold is massively oversold, and historically, these are levels that always lead to a major rally. It’s the calm before the storm.

Some analysts believe we could be looking at gold prices of $1,600 or higher towards the end of 2017.