Let’s Talk About Gold

Gold continues to move higher and higher, making new all-time highs along the way. As we discussed in Calendar Concerns and Gold Gains, we see many fundamental reasons to expect this rally in gold to continue.

Here are the 10 reasons we listed:

• The US dollar at its lowest level in more than two years. Historically, gold and the US dollar have traded inversely. We continue to expect a lower trending US dollar as we discussed in our July 23 LPL Research blog, Dollar Weakness May Continue.
• Growing concerns over US-China relations.
• COVID-19 uncertainty and potential economic weakness.
• European data quickly improving. Europe is doing a great job containing COVID-19, thus potentially strengthening the euro—which may pressure the US dollar lower.
• Record monetary stimulus. The Federal Reserve (Fed) balance sheet exploded to $7 trillion recently, from $4 trillion before COVID-19.
• Nearly $15 billion worth of negative sovereign debt globally.
• Record trade and budget deficits.
• The Fed’s 0% interest rate policy is probably here to stay.
• Negative real interest rates (adjusted for inflation). This makes gold’s 0% interest look pretty good on a relative basis.
• Huge government spending programs may eventually spur inflation.

As shown in the Chart of the Day, if you adjust for inflation, gold is still well beneath the all-time high set in early 1980, and beneath the recent peak in 2011.

Something else we didn’t discuss, but is worth examining is the concept that maybe gold isn’t really at new highs. “Gold is a metal, so it doesn’t pay you any dividends; therefore, inflation can eat away at its true value over time,” explained LPL Financial Chief Market Strategist Ryan Detrick. “In fact, when you factor in inflation, the real all-time high was more than $2,700 an ounce in 1980. Gold isn’t even above the 2011 peak when considering inflation, so maybe this is another way of showing gold has room to run?”