Can record gold price continue to $4,000 and beyond? What history tells us
Gold set a new record over the weekend as prices surpassed $1,920 an ounce, the previous all-time high set in 2011, but momentum may not stop until $4,000 an ounce is taken out, according to Frank Holmes, CEO of U.S. Global Investors, who based his prediction on the effects that monetary stimulus had on gold during the last recession.
It’s important to take Holmes’ forecast into context.
Although gold has already breached all-time highs in several foreign currencies, this is the first time since 2011 that the yellow metal has seen new highs in U.S. dollar terms.
As of 7:00 am EST, spot gold traded at $1,944 an ounce.
In 2011, gold did not consolidate around the peak and form a plateau; rather, the metal retraced almost immediately, beginning a long-term bear trend that troughed in December, 2015.
This pull-back from the highs of nine years ago needs to also be taken into context; September, 2011 was already three years past the start of the last Great Recession, and gold was already in the final innings of a three-year bull rally that started in November, 2008, at the beginning of economic downturn.
Since 1979, there have been five recessions, including the current one that started in February, 2020, as designated by the National Bureau of Economic Research (NBER).
It’s important to note that gold did not rally during any of the prior four recessions, and only saw a bull market manifest after the end of two recessionary periods: 2001 and 2008-2009, as can be evidenced in the chart below.
The chart above shows the Federal Reserve funds rate (blue line), plotted next to the gold price (orange line). From 1979 to 2008, gold and the Fed funds rate moved in lockstep; as interest rates saw a long-term secular decline from the late 1970s to the mid-2000s, so too did gold follow this downtrend. The multi-decade bear cycle in gold prices bottomed in the early 2000s and steadily rose in tandem with rising interest rates until 2007.
The first deviation between gold and interest rates occurred in 2008, when the start of the recession prompted several rounds of quantitative easing, bringing interest rates to near zero, where rates remained until they were hiked in late 2015.
During this period of dovishness from the Federal Reserve, which brought rates down to a level never before seen, gold continued to rise until it reached its peak in 2011.
What set the 2000s apart from prior decades was sharp rises in gold prices that followed drops in interest rates, once in 2008, and more recently this year as the COVID-19 pandemic broke out.
Many analysts attributed this unusual pattern to record levels of monetary stimulus.
“In the next three years, if we look back, if [history] repeats itself, from 2008, 2009 to 2011, that three year run saw gold go from a $750 - $800 range up to $1,900. If we forecast that because we have the same expansion of the balance sheet of the Fed then it would project, if cycles are exactly the same, gold could go to $4,000,” Holmes said in an interview.
He noted that while the Fed has already set records on the level of monetary stimulus injected into the economy, quantitative easing will not stop until the central bank’s balance sheet surpasses $10 trillion .
“This is going to cost the U.S. government approximately $10 trillion in fiscal and monetary policy to get the economy back, so I think that number you’re seeing after 2008, 2009 after Lehman Bros. went bankrupt, you saw the balance sheet expand from $1 trillion to $3 trillion. I think it’s got to hit the overall $10 trillion,” he said.
Holmes is not alone in his long-term bullish forecast. Dan Oliver, founder of Myrmikan Capital, sees prices headed to $10,000 an ounce.
“The Fed, as you know, has been on a massive purchasing spree because of the virus situation, and so therefore the equilibrium price of gold is going up commensurately, and so the numbers now to balance that balance sheet are enormously high,” Oliver said in an interview. “My [forecast for gold prices] has changed. I’m at $10,000 now.”
Still, some analysts see prices overheated in the short-term.
Rick Rule, president of Sprott U.S., said that the possibility occurs for a price correction before a more substantial rally takes place.
"If you asked me my gold price outlook over the two-year or three-year term, I'm bullish to the point of being wildly bullish," Rule said in an interview. "If you asked me my gold price outlook over the next two months, my suspicion is that it might have come too far, too fast."
Rule added that investors can expect lots of volatility for gold in the coming months.