By Andrey Dashkov, analyst, Casey Research
Gold has been a winner this year. As of writing, it’s up 22% year-to-date.
But this return, respectable as it is, isn’t what we’ll remember about gold in 2020.
It was the historical rally gold staged after its March low… soaring 40% to $2,063 in August.
It’s now trading around $1,880 as I write.
But I think it’s very likely we’ll see gold break $2,000 again next year.
Today, I’ll walk you through three reasons why I think so.
Reason #1: A New Stimulus Package
The U.S. economy is nowhere near its pre-pandemic levels. To get it back to the good old days of 3.5% unemployment, the government will need to spend quite a lot.
And the Biden administration has a license to spend. He hasn’t released any official plans yet, but one bill proposes $900 billion in stimulus.
This stimulus is good for gold. That’s because money will need to be printed to finance it.
Regular readers know that money-printing leads to currency devaluation. And as the U.S. dollar weakens, the gold price typically rises as investors rush in to buy the disaster hedge.
As the government spends its way out of this crisis – and potentially into a new one – that’ll be good for the precious metal.
Reason #2: Low Interest Rates
Interest rates drive the price of gold. The lower they are, the weaker the U.S. dollar. And as I said above, a weaker dollar is good for gold.
In the case of interest rates, there’s two things going on.
First, the Fed promised to keep rates low into at least 2023 to help stimulate the economy. But some analysts say it’s likelier rates will remain low into 2024. It’ll take more time than most people think for the economy to get back to normal.
The bottom line is, the Fed will keep interest rates low for a while.
Second, as global governments print more money to spend their way out of the COVID crisis, they’ll cause higher inflation.
Low interest rates, coupled with high inflation, means that real interest rates will go lower still.
Put simply, real interest rates are the nominal interest rate minus inflation. So, if you hold a bond that pays 1% interest per year (the nominal interest rate), and the inflation that year is 2%, your real interest rate is -1%.
And the lower real interest rates go, the higher gold’s price goes. This relationship has been solid for years. Just take a look at the chart below.
As interest rates remain low to try and get us out of this crisis, that’ll only drive the price of gold higher.
Reason #3: Gold Is “Financialized”
Let me tell you what I mean by “financialization” here. It might sound technical, but it’s actually very simple.
Financialization is when “paper” replaces the “real asset.” The real asset in this case is physical gold. The bars, the coins, even jewelry.
By paper here, I mean things like gold exchange-traded funds (ETFs). They’re like surrogates. They’re more convenient than physical gold, but they don’t fully substitute it.
(That’s why we recommend buying and holding physical gold in the Dispatch. But of course, ETFs are still a good way to play the metal. Especially ones backed by physical bullion, like the SPDR Gold Trust.)
For gold, financialization means more people buy it on the stock market via ETFs, and less by purchasing the physical metal itself.
That causes an interesting thing to happen…
The more gold that ETFs hold, the higher the gold price goes. Here’s a chart of the number of ounces a popular ETF – the SPDR Gold Trust (GLD) – holds compared to the price of the metal itself.
As you can see, the relationship is pretty tight. As GLD increases its gold holdings, that drives the price of gold higher, too.
And here’s the kicker. As gold keeps appreciating for all the fundamental drivers that I outlined above, more people will put their money into gold ETFs.
As that happens, the price of gold should keep going up even further.
And all of these forces will support the metal’s long-term bull market.
Consider holding physical gold to benefit. For more affordable and convenient exposure, the SPDR Gold Trust (GLD) is also a good option.
But if you really want to maximize your gains during the coming bull run… Casey Research founder Doug Casey just went public with his winning gold strategy. It’s made him millions. And he went on camera to reveal how you can use it for 50x…
Analyst, Casey Research