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We’re at the Beginning of a Multiyear Bull Run in Gold

Financial Times: August 9, 2016

Sound Money

Diego Parrilla of the Financial Times writes that a “perfect storm” for gold is brewing, driven by a world that is testing the limits of monetary policy, credit markets, and fiat currency itself.

Parilla explains his standpoint and those of his detractors:

“The bearish camp, which has featured prominent and respected analysts like Goldman Sachs, tends to have a constructive view on the US dollar, the ability to raise interest rates, normalise global monetary policy, and generally a benign view on the global economy and inflationary risks.”

“The bullish camp, which I subscribe to, tends to have a more pessimistic view on the global economy and the unintended consequences of monetary policy without limits, and sees the recent price action as the beginning of a multiyear bull run in gold.”

The analyst outlines three factors at play that he says will fuel a huge bull run in gold:

  1. Monetary policy – “Quantitative easing and negative interest rates have been game changers and have dramatically distorted the valuation of government bonds, breaking the theoretical ceiling in prices, squeezing shorts and underweight positions, and feeding what, in my view, is one of the largest financial bubbles in history.”
  2. Credit markets – “The bubble in government bonds and duration has incentivised risk-taking across equity and credit markets, lending to weaker and weaker credits, often ignoring or underplaying the risk of capital losses, liquidity and volatility.”
  3. Fiat currency limitations – “Interest rates are already at record lows, asset purchases suffer from the law of diminishing returns, and competitive currency devaluations only increase underlying problems and global imbalances.”

If the world’s central bankers don’t transition soon to a more normalized set of policies, Padilla claims, a perfect storm for gold will soon erupt, driving the hard asset’s price higher for many years to come.

 

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