The gold market is struggling to find direction. However, with prices trading below $2,000 an ounce, one market analyst still thinks there is plenty of value in the precious metal markets.
In a telephone interview with Kitco News, Michael Howell, managing director at CrossBorder Capital, said that he expects it is only a matter of time before gold prices continue to push higher as governments and central banks around the world continue to pursue aggressive stimulus policies that increase the money supply, balance sheets and deficits.
Howell’s bullish outlook on gold comments come after data from the Federal Reserve recently showed that its balance sheet rose to a new record high above 7 trillion dollars.
“Balance sheet expansion is ultimately going to drive gold higher,” Howell said. “If you do long-term studies of monetary growth against gold, you will find there’s a very much a one-to-one relationship. As the supply of money or the supply of liquidity expands, the gold price tends to go up.”
Howell added that the Federal Reserve’s M2 money supply growth, the amount of paper dollars floating throughout the economy, has grown by about 30% this year. At the current pace of growth of the money supply, gold’s fair value is closer to $2,500, Howell said.
“In other words, gold is looking pretty cheap against the vast increase liquidity,” he said.
But it’s also not just the Federal Reserve; Howell noted that central banks around the world are increasing their balance sheet with alacrity and this is what will drive gold’s long-term uptrend.
Although gold has seen a lackluster performance since hitting its all-time highs in August, Howell said that he expects the precious metal to embark on a new rally as central banks ramp up their stimulus measures in the new year.
CrossBorder Capital sees global central bank balance sheets growing by about 30% this year and is forecasting further liquidity growth of between 15% and 20% in 2021.
“You are going to have so much liquidity in markets that gold has to go higher,” he said.
For next year, Howell said that global liquidity could push to as high as $195 trillion.
“These are, these are big numbers. This is more than twice world GDP,” he said.
Howell added that he doesn’t see this trend only increasing over the years as governments continue to spend to support their domestic economies and central banks increase their balance sheets to all this spending. He said that here is a growing risk that the global monetary system creates a liquidity debt vortex that feeds off itself.
“The problem is the debt quality, as the vortex is spinning, gets poorer and poorer and then you can ultimately see defaults,” he said.
Looking at the broader landscape, growing talk of central banks developing a digital currency system, Howell said, will only exacerbate the issues. He added central banks could unleash a global digital currency within the next five years.
“In a world where we have a central bank, digital money, why does the government need to issue debt anymore?” he asked. “Government debt is a liability of the state, but who says it has to be 30-year or 10-year or five-year or two-year debt. Why couldn’t it just be a permanent liability in perpetuity to the central bank? The central bank could have an overdraft account for labeled government use and expands its balance sheet accordingly.”
Howell said that in this scenario, it will be imperative for investors to hold, not just gold, but bitcoin as well.
“Holding alternative assets like gold and bitcoin makes sense from a long term perspective, you’ve got to have that, that ability to diversify,” he said.
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