The financial authors who are bullish on gold for the near and medium term provide superb technical reasons to support their assessments all of which fall under the wide umbrella of powerful geopolitical shifts that signal greater risk, stress and volatility to the global economic system.
It's not just one trigger point rather a series of near simultaneous triggers that will not necessarily occur in lockstep, be directly interconnected or even of extreme severity. Markets move powerfully based on perception and can create links between events where no direct economic linkage exist - a form of fake economic news.
Each successive recession has been more severe during the past 20 years. Since the Great Recession of 2008, little substantive work has been done to overhaul these economic structures.
The global economic system is in distress and about to crack with a resulting market correction, market crash or whatever terminology will be used for this downdraft. Because the sudden market rise is based primarily on perceived economic laissez faire policies of a president-elect is not only unsustainable on its ascendency, so shall the downfall be as sudden when this anticipation does not materialize.
We're in the midst of historic global political and economic shifts that began in earnest with the shocking Brexit vote to leave the E.U. followed by the even more shocking presidential election victory of Donald Trump. Meanwhile additional potential upheavals are in waiting in line so to speak for 2017 including the upcoming French election in April (possible runoff in May) followed by Germany's elections in the fall. Both countries have increasingly popular conservative and nationalist parties which, if elected or secure enough legislative seats, can dramatically influence and change Europe's domestic and foreign policies which may be contrary to America's core interests.
Complicating political matters further is, for the first time in history, the simultaneous inauguration of the new UN head and a new US president. How the new leadership in major sovereign countries and the United Nations communicate adds more risk and volatility to the world stage.
Liberal democracies have trouble seeing eye to eye on issues with the UN and each other so you can imagine what will happen with democratically elected governments with populists and nationalist characteristics.
Economically, the explosive world debt and the shadow market bring enormous risk. In October 2016 the IMF reported an estimated $152 trillion (NYSEARCA:USD) in world debt with warnings about tepid growth and deleveraging with the greatest risk in the euro zone and China.
The shadow markets play a mostly legal and useful role by enabling and expediting important transactions while legally avoiding governmental restrictions and oversight by governments. Because of a lack of transparency, no one really knows how big the shadow market is, its components and their level of risk. If US government agencies had difficulty measuring the impact in a reasonably transparent domestic economy during the 2008 economic crisis, what will happen in an opaque one, specifically China?
The Financial Review article entitled "Three Scenarios for China As It Plays An Economic Endgame" dated January 4, 2017, presented three possible scenarios for China as follows - (1) optimistic new economic growth, (2) stagnation and (3) acute crisis. I concur with scenario #3 with shadow banking as well as many Chinese gold buyers through a surge of gold purchases as articulated in December 16, 2016 edition of The Wall Street Journal article "Chinese Buyers Find Bargains in Gold."
At any one time there has always existed many possible triggers and flashpoints however today's threats have a considerably higher probability of occurring in a more technically advanced multi-polar world. The more notable ones, not necessarily listed in order of probability, include:
- A faltering and heavily indebted Chinese economy
- Weaker than expected US economic performance
- EU members states political upheavals
- Trade war with China
- Renewed sanctions with Russia and Iran
- South China Sea - maritime incidents and Taiwan
- Aggression on the Korean peninsula
- Russian threats on the Baltic states
- Destabilization in Saudi Arabia and Turkey
In times of economic turmoil with a looming flock of black swans on the horizon, gold is one of the few commodities whose value will increase exponentially during a crisis, perhaps a prolonged one.
For these reasons I recommend gold investments in gold ETFs such as iShares Gold Trust (NYSEARCA:IAU) or physical gold. Gold mining companies are a secondary recommendation reserved for those who follow them closely because their stock does not necessarily follow in tandem with the commodity itself because the values are based more on their financials and operations.
In summary this makes for a perfect economic storm in which everyone will seek "flight to safety" in gold. The window of opportunity to purchase gold at a bargain price is rapidly closing and I project that the sudden gold price rise will be maintained far longer than the gold bull market during the early years of the 2008 Great Recession.
Disclosure: I am/we are long IAU.
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.