Gold could be worth far more than what speculators and traders have determined to be the current spot price.
There’s a hidden indicator for the intrinsic price of gold that many investors have ignored. In addition to looking at the cost of mining gold, the level of government debt and total gold production, a major indicator that perceptive investors should pay attention to is central banks’ balance sheets.
According to Deutsche Bank’s Michael Hsueh and Grant Sporre, there is a correlation between the rates at which the gold price changes and central banks buy assets. They have historically moved in tandem with each other.
But we are in an unusual period that is an exception to the rule…
From 2005 to today, aggregate central bank balance sheet of the Federal Reserve, European Central Bank, Bank of Japan and People’s Bank of China expanded by 300%. Over the same period, above ground gold reserves around the world grew by 19%, equivalent to a 200% increase in value.
Based on the historical data, Hsueh and Sporre calculated that the price of gold should appreciate to at least $1,700/oz. At the moment, gold is trading around $1,325/oz. Otherwise, central bank assets would need to dramatically decrease, an politically and economically impossible idea.
The largest difference between the gold price and central bank balance sheet was in 2013, at the end of the Federal Reserve’s third quantitative easing program. The Fed’s balance sheet in 2016 is still very high compared to relative in the price of gold.
Some analysts believe the Fed is considering a fifth round of quantitative easing to stimulate the economy out of anemic growth. If the Fed raises rates early next year after the election and the stock market reacts negatively (like when 93% of stock investors lost money in January 2016), then a fifth round of quantitative easing will be very likely. No other monetary policies are options as the Fed has used them all in the Great Recession and interest rates are already at an all-time low.
Hsueh and Sporre argue that, “As long as the central banks’ balance sheets continue to expand, the gold price should maintain some momentum.” We believe that the world’s largest central banks will continue to buy assets in future quantitative easing programs and that a large reduction in asset holdings is very unlikely.
Therefore, the historical data shows that the gold price will need to appreciate, sooner or later.
Your IRA account may be the ideal vehicle for buying and holding physical gold, silver, and other precious metals. If you don’t have an IRA, now is a great time to set one up and begin building a precious metals portfolio.
To take steps to potentially protect your portfolio and financial future, feel free to give me a call today at 1-800-341-8584. I will walk you through the entire process and answer any questions you may have.Tags: advantage gold, appreciation, balance sheets, central banks, deutsche bank, gold, quantitative easing