(Kitco News) - After hitting record highs above $2,450, the gold market is again struggling as hawkish sentiment from the Federal Reserve spooks markets; however, according to one market analyst, gold’s rally is far from over.
In his latest gold commentary, John Ing, President and Chief Executive Officer of Maison Placements Canada Inc., reaffirmed his price target, expecting the precious metal to rise to $3,000 an ounce within the next 18 months.
Although the Federal Reserve’s aggressive monetary policy has increased gold’s opportunity costs as a non-yielding asset, Ing said that the government’s burgeoning debt is overshadowing current monetary policy.
“More than anything, gold’s push through $2,400/oz was due to rising U.S. debt, which caused money to flow into gold for defensive purposes,” he said in the report published last week. “Since March, gold has been up $500 an ounce, setting numerous all-time highs as the monetization of debt became an instrument of public policy. Americans can carry a lot of debt, but as the burden grows, the sustainability of their monetary and fiscal policies leaves little margin for error.”
Ing Warned investors that rising protectionist sentiment, led by the U.S., could exacerbate growing debt concerns, making the U.S. dollar “the weak link” in global financial markets, which would benefit gold.
“Gold is universally fungible and finite. Gold can be bought and sold in US dollars and thus is an alternative to fiat money for both central banks and investors, particularly since gold is also outside the Western-based system,” Ing said. “The Saudis are selling oil for yuan, and China has grown to be their biggest consumer. This signals a fundamental shift in power from the West to the East, with the petroyuan taking the place of the petrodollar.”
Ing explained that China’s growing appetite for gold will further pressure the U.S. government’s fiscal situation. He noted that China’s U.S. Treasury holdings have dropped to a 14-year low at $775 billion. As it sells U.S. bonds, the central bank has been buying gold, increasing its reserves for the last 18 consecutive months.
“China’s diversification moves gives them more options which could further affect its huge holdings of U.S. Treasury bonds at a critical time since America needs others like China to help finance its whopping national debt at $34 trillion that is bigger than the combined economies of China, Germany, Japan, India and the UK,” he wrote in the report.
“Dollars are being utilized less and less as bullion gains a greater percentage of the reserves held by central banks worldwide. For China, gold is the new critical mineral,” Ing added.
At the same time, Chinese retail investors are also significantly impacting gold demand. Ing noted that Asia has become a leader in the gold market as the Shanghai Gold Exchange has emerged as the largest physical dealer in the world.
“We believe fiscal, monetary and geopolitical uncertainties have driven investors into gold as an alternative currency, or the classic store of value,” he said.
Along with his bullish outlook on gold, Ing said he sees potential and value within the mining sector, even as costs increase.
“The group is undervalued on multiple fundamentals (market cap/reserves, earnings, cash flow and balance sheets) particularly against the overvalued S&P 500,” he said. “We continue to like the senior producers like Barrick, and Agnico-Eagle. Developers are the next group, bringing on mines over the next couple years like B2Gold, Endeavour Mining, McEwen Mining and Eldorado. There are many explorers that are very cheap. But instead, we have focused on those players with advanced PEAs or FS which are likely to get financed in this current bull market.”
