Since WWII, there have been only two major bull markets in gold. But recent events and market conditions have some investors, including Bridgewater’s legendary Ray Dalio, convinced that there is currently a solid case for a bull market in gold.
But Why?
Here are some of the major reasons why gold may be entering a bull market:
Gold has rallied healthily and, at the time of this writing, is trading above USD 1,500 per ounce. This is the highest since April of 2013.
Global interest rates need to stay negative or very low due to current economic conditions. Major central banks are dovish and there seems to be nothing on the immediate horizon to change that stance.
Equity valuations in the US and other major economies are extremely high across the board and there is a huge risk of complacency creeping in across global financial markets.
The USD may be entering a bear market or at least a long term area of consolidation; the monthly chart for US Dollar Index, which is an index of the USD relative to a basket of 6 other major currencies, show the index posting a lower low and possibly a new lower high.
Demand for gold has increased; even though gold prices have remain relatively low, the last few years have seen global central banks, particularly China, Russia and India, accumulate vast amounts of gold reserves. In fact, the World Gold Council states that 15.7 billion US dollars’ worth of gold was acquired by central banks in just the 1st six months of 2019.
This is the largest ever recorded acquisition of gold by public institutions in the 1st half of a single year. In addition to this, industrial and commercial demand for gold has also increased, particularly with the growing Indian middle class; India being the world’s largest consumer of gold.
Weak movements of equity prices have historically gone hand in hand with higher gold prices. The S&P 500 appears to be faltering with numerous sharp corrections in the recent past and recoveries that appear to possibly hold less conviction than the one before. This could lead to weakening equities or at least some period of consolidation, which could create a favourable environment for gold.
China and the USA have been engaged in a trade war for more than a year. This has resulted in tension between the two economic superpowers, which has spurred massive uncertainty in global financial markets. Many investors are thus keen to move to safer assets such as gold.
Tensions in the Strait of Hormuz and a possible military conflict between Iran and the United States or Iran and one of the US’s proxies in the region is creating even more uncertainty in financial markets and also increasing the attractiveness of gold.
Finally, the shifting global macroeconomic environment and the, arguably, diminishing role of the USD as the world’s reserve currency could also add some shine to gold over the long term.
So is it a Bull Market?
Well, there are plenty of indicators to show a high probability for gold prices to increase over the medium to long term. But whether a new gold bull market is actually upon us or not, we’ll have to wait and see.
