GLD: Why Gold Is Headed For $3000
Summary
- Gold tumbled to negative on the year due to liquidation-driven selling alongside broader markets and Treasuries.
- Seasonal weakness and lopsidedly long positioning in large speculators have added to near-term pressure on gold.
- A ballooning Fed balance sheet and federal deficit vs. GDP suggest breakout to new all-time highs in gold is on the horizon.
- We reckon any dips would be great buying opportunities to build a long-term position in gold.
The wrath of the margin call selling spared no one, as safe havens including gold (GLD) and Treasuries (TLT) were also dumped during the epic collapse of the stock market. Particularly for gold, the slump wiped out 7+% year-to-date gains and turned negative within a matter of 2 weeks.
Source: WingCapital Investments
"Cash is king" became the predominant theme with the U.S. dollar (UUP) index on the verge of breaking above multi-year high.
Source: WingCapital Investments
Until recently, gold had been able to rally in tandem with the U.S. dollar as pointed out in the previous article, though the liquidation-driven chain-selling proved too much to overcome for the precious metal. From a bigger picture, gold remains on a long-term recovery uptrend since bottoming in 2016 and found support at its rising 50-week moving average.
Short-Term Headwinds Remain
Before getting to the bullish factors, we will provide an update on the two headwinds that have piled downward pressure on gold recently. First is the net positioning of large speculators, who started trimming their lopsidedly long positions in gold futures on the heels of the margin call sell-off, but still have ways to go before normalizing to more moderate levels.
Source: Commitment of Traders
Seasonality remains negative for gold in the short-term, as gold historically tends to trend lower into the summer according to EquityClock. Thus far, the seasonal chart has been spot on in terms of forecasting the February high.
Source: EquityClock
Gold's Long-Term Prospect Is Brighter Than Ever As Fed Goes Nuclear
As discussed in our last article, despite the possibility of a short-term top, we advocated taking a long-term bullish view on gold based on the two premises that the Treasury yield curve has re-inverted while the Fed's balance sheet is about to expand again. Actually on the latter, explode became a more appropriate term in light of the Fed's announcement of unlimited QE today. To wit from MarketWatch:
The Federal Reserve on Monday announced it would purchase an unlimited amount of Treasurys and mortgage-backed securities in order to support the financial market. The Fed said it would buy assets "in the amounts needed" to support smooth market functioning and effective transmission of monetary policy.
Furthermore, just as U.S. Treasury yields have been following the footsteps of German bunds, the Fed will also start buying corporate bonds just like the ECB. Per Washington Post:
The Fed also announced Monday that it will buy certain corporate bonds for the first time in its history and said it will “soon” announce a Main Street Business Lending Program. These programs are meant to provide ample availability of loans to small and large businesses on top of any moves by Congress.
With the Fed's latest buying spree upped to $125 billion per day in Treasuries and MBS, its balance sheet has already surpassed its previous all-time high and sky is now the limit. Even if we exclude the corporate bond buying and loan facilities, the $625 billion per week pace would almost triple Fed's balance sheet in 3 months:
Source: Federal Reserve Bank of St. Louis, WingCapital Investments
Federal Deficit vs. GDP %: Even More Important Long-Term Bullish Indicator
While Fed's infinite monetary stimulus has become the spotlight, another indicator that bears profound significance on gold's bullish outlook is the imminent ballooning federal deficit. Indeed, the extraordinary fiscal spending to cushion the damage from a paralyzed economy arguably exceeds that during the World War II. In terms of numbers, according to CNBC:
A $2 trillion deficit, which seems conservative given the current scenario, would push deficit to GDP to 9.4%. A $3 trillion shortfall, which seems like not much of a stretch, would take the level to 14%.
Historically we notice that the level of deficit relative to GDP exhibits even higher correlation than the size of Fed's balance sheet. Specifically, we observe that gold's previous secular bull run ended when deficit / GDP started declining and did not bottom until the ratio's trough in 2016.
Source: Federal Reserve Bank of St. Louis, WingCapital Investments
From that point on, it is without coincidence that gold prices became reinvigorated just as government spending started rising again. Going forward, with wartime fiscal measures being enacted, deficit vs. GDP % will undoubtedly skyrocket beyond the level set in 2008 Great Recession, even towards the 20-30% level during WWII:
Source: US Government Spending.com
As we type, gold has already rebounded back above $1600. Though, with the take-off just getting started, we reckon there will be dips to jump on the bandwagon. In terms of price outlook, using the post-2008 GFC bull market as a guideline, during which gold more than doubled after the Lehman debacle within the ensuing 3 years, $3000 would be a reasonable long-term target in our opinion.
To conclude, the stars are aligned for gold to continue not only matching to but surpassing its all-time highs. We reckon any dips resulting from seasonal weakness or liquidation-related selling from large speculators to be a buying opportunity to accumulate long-term positions.
This article was written by
Analyst’s Disclosure: I am/we are long XAUUSD:CUR. 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.
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Comments (42)
It's probably the reason why actions are now being taken against precious metals fraud by the US government.When France drained the US of its gold, it was stopped by Nixon.
Nowadays gold is flowing to the East at a fast pace.i.imgflip.com/...source : goldchartsrus.comThis is likely not allowed to go on, once again.
It benefits Wall Street far more than Main Street.With low interest rates already around the world we're likely to enter a new phase with direct fiscal stimulus to Main Street. This would be inflationary.
