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A rise in U.S. money supply will drive gold, silver prices to new highs - Wells Fargo's John LaForge

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(Kitco News) - Despite recent volatility, the gold market continues to hold firm support at around $1,950 an ounce. However, despite the precious metal's resilient strength, one analyst says something more is needed to drive the precious metal to record high.

In an interview with Kitco News, John LaForge, head of real asset strategy for Wells Fargo Investment Institute, said that gold and silver have been underperforming general commodities in a broad neutral trading range for the last three years. He added that the precious metal market is stuck as investors continue to focus on tightening U.S. monetary policies and the sharp drop in U.S. money supply.

However, LaForge added that with the Federal Reserve nearing the end of its tightening cycle, both gold and silver could be on the cusp of a long-term bull market as part of the larger commodity super-cycle. He said that it's only a matter of time before the U.S. central bank starts pumping money back into financial markets to keep the economy from slipping into a recession.

"If we do get this jump back up in Money supply and again and investors start to worry that we are printing too many of these little pieces of paper, we will finally see that long-term run in gold and silver. I would expect that rally to last for three years," he said.

LaForge added that it wouldn't take a significant rise in the money supply nor a major shift in U.S. monetary policy to support gold prices at record highs. He added that the market is already sensitive to the government's massive deficit spending.

The comments come as the U.S. deficit has surged by more than $1 trillion in the last two months since the U.S. government resolved its debt ceiling crisis in early June. LaForge said he expects the deficit to be a significant talking point ahead of the November 2024 elections.

"The more politicians talk about deficit spending, the more people will realize just how unstainable this environment is," he said. "Where do you go when people start losing confidence in their currency and want to preserve their wealth and purchasing power?"

LaForge said that as the November election approaches, the U.S. could face a similar situation that sparked a crisis of faith in the U.K. bond market last year. The British bond market saw a significant meltdown in October after the then-newly-minted Prime Minister Liz Truss released a mini-budget that proposed the nation's biggest tax cuts in 50 years.

Truss lasted six weeks as the Prime Minister and the Bank of England had to support the bond market.

Another potential piece to the gold rally is a further deterioration in the U.S. economy. He added that the Federal Reserve could be forced to expand its balance sheet as smaller regional banks continue to feel the pressure of a weakening economy, rising corporate bankruptcies and tighter financial market conditions due to rising interest rates.

"I don't think it will take much to wake people up to how fragile the economy actually is. There are a lot of potential little triggers that could create a big move in the market," he said.

Gold investors will be watching U.S. data like a hawk next week, anticipating a weakening trend

Looking at gold and silver's technical outlook, LaForge said that despite the long-term consolidation, the precious metal is in a good place to capitalize on any market uncertainty.

"The only thing that's really disappointing with gold and silver now, frankly, is that they're not breaking out to the upside," he said. "They don't look bad. They're just going sideways, waiting for a trigger."

While LaForge is bullish on gold and silver as investment demand is expected to pick up, he explained that the fundamental supply and demand picture will keep prices elevated long-term.

He noted that even if the U.S. slips into a recession, impacting demand for gold, particularly silver, dwindling supply will keep prices well supported.

"Ten years ago, broader commodities saw significantly higher prices, and everyone was out looking for deposits and finding them. The market became oversupplied, and prices have suffered. Fast forward ten years later, after years of weak prices, there is no supply left," he said. "Gold and silver have two of the best-looking supply growth charts of any commodity, meaning there's no growth there. So should not take much in demand to support prices at elevated levels."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.