An Emerging Opportunity in Gold Markets

Whether you believe it or not, there is a paradigm shift happening in global gold markets which is presenting a once in a life-time opportunity for investors of the yellow metal. With gold prices topping $2,000/ounce for the first time in nearly a decade, nearly every junior mining company associated with gold has seen its share price more than double and many experts believe that things are just warming up.

Pierre Lassonde, chairman of Franco Nevada, believes gold prices in the next five years can hit anywhere between $2,500 and $10,000 an ounce, if historical equities to gold ratios are applied to current levels, as historically, the Dow Jones to gold ratio hit one to one during times of peak gold prices.

“Today, we’re at 22 to one (Dow to gold ratio). So, I look at the next five years and [the ratio] could be anywhere from two to seven, and I look at the 22 to one, where would the one to one [ratio] be? Well, that’s $25,000 to $27,000 today. Where would two to one be? Well, that’s $12,500. And where would five to one be? Well, that’s $5,000,” he said. “Those numbers are not that crazy.” But what is causing such a meteoric rise in gold prices and is it sustainable? Throughout history, gold has always been viewed as a safe-haven asset and has a tendency to outperform in times of crisis and turmoil. Investors, whether it be individuals, companies, funds, or governments, use investments in gold to hedge their portfolios against potential declines in the economy and market. Having gold in your portfolio is like buying insurance for your car or home. It keeps your portfolio protected when markets turn sideways. In the past 6 months, the global economy has been decimated by the COVID-19 pandemic and as a result, investors have flocked to gold investments. On top of that, central banks are printing record amounts of money, inflation is rising, and escalating tensions between the USA and China have also added to the uncertainty surrounding the future of the global economy which has generated even more investments in the precious metals sector. Another important factor that has played a role in gold price fluctuation is [real] interest rates. In a rising or high interest rate environment, investors prefer stocks and bonds because of the high returns. In a declining or low interest rate environment, stocks and bonds become less attractive because of the low returns. It is also important to distinguish between the nominal and real interest rates. The real interest is basically the same as the nominal interest except it also accounts for inflation. This is crucial when evaluating the effect of interest rates on gold prices because gold is considered to be a hedge against inflation. When inflation is high, investors prefer gold to fiat currency because the intrinsic value of gold is not affected by inflation, but fiat currency loses its value.

The current nominal interest rate sits at 0.25% in the US, which is low. However, the REAL interest rate (which accounts for inflation) is actually getting closer to negative territory. If this dips into negative territory, investors will be losing money having their money invested at this rate, which makes a compelling case for an investment in gold. To put it simply, in the last 15 years, there has never been a more exciting time to invest in gold! If you would like to hear more about our #1 gold mining stock, click here.

- SmallCapInvestor