Gold Prices Are Heading Towards Record Highs


Author: Jeffrey Taylor

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When measured in U.S. dollars, the price of gold is rapidly approaching its all-time high. According to recent research reports, gold prices will do the same when measured against other major currencies.

In recent years, gold has performed well. Year on year, the yellow metal is up by 35 percent while the S&P 500 and other major averages are down. There are numerous factors, including immense debt and unprecedented monetary expansion, that indicate gold prices will move higher over the next couple of years.

To deal with the financial fallout caused by the coronavirus pandemic, the Federal Reserve is printing an unprecedented amount of new money. The government has recently announced monetary programs running into the trillions of dollars. These programs will provide a massive amount of liquidity to markets, preventing the economy from collapse. As well as Federal Reserve stimulus, government-sponsored bailout programs are injecting capital into the economy as well.

There is a Problem

As helpful as government programs are, there is a significant problem. The U.S. government does not have any money. The trillions of dollars in assistance are coming from the Federal Reserve. The Fed is in a position to purchase corporate bonds, treasuries, or any other form of debt to inject huge amounts of capital into the system.

This approach is bound to dilute the monetary base of the U.S. The monetary base had been falling, albeit slightly. The financial impact of COVID-19 has reversed the trend. The monetary base is now $3.9 trillion, on par with all-time highs. However, with the Fed’s printing presses just warming up, the post coronavirus monetary base could be a staggering $10 trillion, or even more.

The U.S. currency is no longer backed by gold, having been decoupled in 1971. Despite the decoupling, the dollar still compares closely to gold. During the years 1971 to now, there has been an increase in the monetary base of about 4,775 percent. During the same period, the price of gold has increased by about 4,600 percent. Despite the decoupling, the price of gold and the expansion in the monetary base continue to be closely correlated.

What Does the Future Hold?

The market knows one thing. The monetary expansion is just starting. As the Fed continues to monetize debt and plow liquidity into certain areas of the market, today’s monetary base of $3.9 trillion is bound to go substantially higher.

An expansion in the monetary base will translate into higher gold prices. Using the current monetary base of $3.9 trillion and the forecasted monetary base of $10 trillion, the result is an increase of about 156 percent. If this ratio is applied to gold, the price could be around $4,400 within the next couple of years.

At the moment, the price of gold is lagging slightly behind monetary base expansion. In 1971, the monetary base was $80 billion vs. a potential $10 trillion monetary base within a couple of years. This equates to a percentage increase of 12,400 percent, give, or take a little. In 1971, the price of gold was $36.56. When the same percentage increase is applied, the price of gold should be around $4,750.

Regardless of how one looks at it, either approach results in a plausible gold price of about $4,500 over the next 2 or 3 years.

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Jeffrey Taylor is a retired mechanical engineer who has an interest in all things financial, including emerging markets and cryptocurrencies.