The Most Bullish Case For Gold

Includes: FXY, GLD, SPY
by: Macrotheme Capital Management LLC

The current macro-environment is ripe for the price of gold to spike much higher. Specifically, the situation in Japan will prove to be a major catalyst for gold.

Since November of 2012, when Japan took bold steps to artificially defeat deflation by devaluing the yen (NYSEARCA:FXY), the stock market spiked higher (NYSEARCA:SPY), and gold (NYSEARCA:GLD) tumbled - see chart below.

What's going on in Japan?

Japan is taking the page from the Bernanke's playbook to finally end the 20-plus-year struggle with deflation by deliberately devaluing the currency, and thus artificially creating inflation.

Why is this important for the price of gold?

If Japan is successful by actually winning the war on deflation by deliberately deflating the yen, it will set an important example or case study - and the entire world is watching. Thus, other countries struggling with deflation are likely to go all-in and follow the Japanese example by using the printing-press to deliberately devalue their currencies - a practice previously only used by the U.S., and now the Japan. This describes the so-called hyperinflation scenario due to currency debasement, which would propel gold prices higher.

On the other hand, if Japanese fail to boost inflation and if/or the global community prematurely ends the competitive devaluations, the entire system based on loose monetary policy essentially ends. As a result, it is likely that the new system will limit the printing press, which could resemble a variation of the gold standard - also very bullish for price of gold.

Thus, it seems like the Japanese experiment presents a win-win situation for gold prices in intermediate to longer term. In short term, gold could correct even further due to optimism and risk-on investing, but longer term the current macro-environment led by Japan presents the most bullish case for gold - possibly ever.

We recommend that investors buy physical gold, and with 2- to 3-year horizons. Gold futures are highly leveraged and thus very risky for most investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.