Is “A Perfect Storm” Really Brewing For Gold?

You might remember the concept of a perfect storm - an event in which several different factors all run into each other at the same time in order to create a whole that is greater than the sum of its parts. In the world of weather, a “perfect storm” is an event to watch out for. But in the world of gold investing, a perfect storm for gold investors might mean something else entirely.

That’s why it raised a few eyebrows when Diego Parilla, co-author of “The Energy World is Flat,” proclaimed that such a storm is coming for gold—and it could send the precious metal as high as $3,000 per ounce. Is he way off base, or is there something we can read in the clouds that suggest a perfect storm may already be on the way?

Identifying The Clouds On The Horizon

If you’re going to read the weather, then you need to know the clouds, the signs of weather approaching. If you’re going to read the economic weather, you need to do something similar: you need to be able to recognize the signs of a burgeoning bull market for gold.

We recently examined the possibility of a bull market for gold right here in this space. Now it’s time to look ahead at the individual factors and see if this year’s strong performance for gold is a fluke, or just the beginning of something even deeper.

What are the factors here? Consider:

• Global central bank policies. It’s not just the Federal Reserve, which has kept interest rates low for a long, long time. Other central banks are buying up gold and keeping interest rates low. The ECB, the European Central Bank? 0%. Bank of Japan? 0%--or lower. The Federal Reserve is at about a quarter to .5%, but previously-optimistic signs that the U.S. would raise rates have fallen short.
• Rising demand. This goes hand in hand with central bank policies as investors look for long-term stores of wealth that may produce better returns than keeping their money tied up in banks.
• Nowhere to go. Perhaps most alarming? The idea that if monetary policy is already stretched to its limit, central banks will have nowhere to go if there is any more economic trouble. This leads some to suspect that another round of quantitative easing may be on the horizon—and many investors in gold are taking notice.

Because gold is typically a hedge against inflation, the weaker the dollar, the more dollars it takes to buy an ounce of gold, and investors who are wary about monetary policy will continue to flock to it. Capital Economics doesn’t have as optimistic of an estimate for the price of gold as Parilla, saying that it might go to $1,350 by the end of the year, but if gold were to land anywhere between the two estimates, it’s clear that this will have been a strong year for gold while other economic indicators are lagging.

Whether this is merely a temporary rainstorm or truly a “perfect storm,” only time will tell. But there are clouds in the sky and the smart investors are getting ready.