Gold May Be the Best Asset Class in 2020
The added geopolitical tensions in the Middle East add yet another reason to keep gold exposure in your portfolio in 2020. As we listen to the gaggle of former central bankers in recent months now admitting that monetary policy is less effective and can’t do all the lifting, the spectre of more central bank buying is present too. Draghi and Yellen are two of the most recent calling for more fiscal policy efforts. The US is already running a 5% fiscal deficit, yet she believes there is more room (and need) to boost the economy already at full employment—hum…
The chart shows just central bank and ETF demand are already higher today than when gold spiked above $1900 in 2011. The call for fiscal efforts by governments to boost growth could be inflationary.
But who’s going to buy all that new debt? The Federal Reserve and all their central bank friends that who and most likely by way of quantitative easing. Governments are heading towards cranking up the printing press and that could play out many different ways. Last time the expectation was inflationary and it never came.
If the money starts to increase incomes by way of lower taxes or a universal basic income, then yes, we could have an inflation problem. But if it only leads to excess reserves and the money does not move through the economy and expand the multiplier, then it may just boost asset markets as it has done for several years now. In either scenario of inflation or more QE, gold should win for a while longer.
I see gold getting back to its previous highs above $1900 in the next few years. Whomever wins the 2020 US election, Congress is going to spend trillions on tax cuts, infrastructure, and very possibly a green new deal if our expectation that the vast majority of millennials will vote DJT out of office for his abject failure on the environment. In general, millennials care far more about the environment they are inheriting than they do about taxes.
The overnight gap up in gold hit resistance from the 61.8% Fibonacci around 1588 (spot). A weekly close above this level suggests the next resistance at 1800 could be tested quickly. The last major rally from 2010 to 2011 in the wake of QE2 never led to an inflation push since the vast majority of the liquidity the Fed injected was left as excess reserves and never lent out. But it did find its way into financial assets. Fiscally, the US has added $11T federally in new debt since the Lehman bankruptcy cascaded the financial world in 2008 with little sign of inflation. To even insinuate that the governments are not doing enough fiscally is laughable. Both monetary and fiscal policy tools are less effective than they once were.
The type of reaction markets may have will depend on policy choices in the future and they would be very different depending on who is president in 2021. In either case, they will be spending bags of money and most of it will need to be monetized because the economy simply wont function well with higher rates. Both scenarios are very bullish for gold.