I have remained bullish on gold since the beginning of 2016. So far, I have achieved all my price targets for gold and very close to my recent target of $1,400 per ounce. I have become ultra-bullish on gold after the recent political events.
The outcome of the Brexit vote is clear now. Frexit, Nexit, and Italeave referendums are on the table. This will have a ripple effect from UK to Europe to China and ultimately the U.S. economy. It will affect global trade and weaken global growth further. Equity markets have turned red post Brexit. There will be negative impact on earnings and revenue of U.S. multinational companies. According to Factset, the June quarter will show an earnings drop of 5.1%, including energy companies. Earnings recession will continue in the coming quarters.
Crude oil prices are unlikely to sustain above $50 per barrel amidst weak global growth. This will keep inflation below the Fed's target rate of 2%. Job additions and new home sales in the U.S. are slowing down. Domestic capital spending is declining. Nearly 6.6 million Americans have no emergency saving. The Fed has been delaying rate hikes citing issues like weak Chinese economy, and Brexit. The fundamental problem is that a rate hike will weaken U.S economic growth. It will strengthen the U.S. dollar further and make U.S. exports, goods, and services less competitive in a slowing world. I expect no rate hike for the next two to three years.
History repeating itself
Since 1993, consecutive U.S. Presidential terms have ended with a bubble burst and a recession towards the end of the President's second term. William J. Clinton's second term ended with tech bubble and a recession. George W. Bush's two terms ended with housing bubble and a recession.
Barrack Obama inherited a recession bigger than his predecessor. During his consecutive terms, Quantitative Easing (or QE) enabled many American companies to fund share buybacks at low interest rates. Once QE ended, they headed towards Europe to borrow at low interest rates. The ending of QE and a sharp fall in commodity prices strengthened the U.S. dollar. The capital flight towards the U.S economy is making the U.S. dollar expensive. American companies are feeling its impact in the form of revenue and earnings recession. If history repeats, then the next U.S. President will face a recession lead by U.S. dollar bubble.
Presidential candidates claim to invest in infrastructure, reduce taxes, reduce college cost, and renegotiate U.S. debt. This increases the likelihood of government spending through debt issuance. There are high chances of rate cuts, and QE in the future. Gold prices will touch life time high once that happens.
I remain bullish on gold with a price target of $2,000 per ounce by 2018.
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