Six Forces Driving Gold Much, Much Higher

Thinking twice about whether gold might be the right investment? Take a look at what’s going on in the world, and pay attention to the global economic and geopolitical trends.

Here are six things happening now that might help you decide.

ONE - INTEREST RATES ARE ON THE RISE:

The interest on the US national debt is growing faster than anything else in the federal budget; a fact that has been confirmed by the Congressional Budget Office (CBO).

It is estimated that in just 10 years, the federal budget will have to spend about $1 Trillion paying off interest. This amount is so large and unprecedented that it risks crowd-out every other item in the federal budget, from national parks to defense spending.

It's highly unlikely that the federal government will allow this to happen. To solve this problem, it may resort once again to "money creation." This means that the dollar’s purchasing power will once again decline and gold prices will naturally rise.

TWO - OIL PRICES ARE ONCE AGAIN RISING:

You've probably noticed the higher gasoline prices at the pump recently. You probably also see the difference between today's prices and those of a few years ago, between 2015 and 2017. Oil prices are once again on the rise, and it's going to get worse. Six months ago, oil was trading around the $40 range. Now oil is approaching the $70 range.

As you may well know, energy costs are considered a core component of inflation. Not only does it affect your gas prices, but energy inflation also affects almost every industry in the US economy. It takes energy to grow food, transport food, and supply businesses on a day-to-day basis. Higher energy costs usually translate into higher product costs across the board. For many of us who were around in the 1970's and 1980's, we remember the insidious effects of an inflationary environment.

We felt the higher costs hit our wallets. We saw how inflation severely reduced our purchasing power. And we also saw how gold soared, peaking in 1979 as it rose by 120.57%.

THREE - THE RISE OF THE PETROYUAN:

China’s successful launch of Petroyuan Futures earlier this year marks the beginning of an era in which its trading partners may begin abandoning the Petrodollar for the Petroyuan.

China and Russia are working to rid themselves of the yoke imposed by the US Dollar. Therefore China has begun using its currency for trading oil. Its ultimate goal, however, is to get Saudi Arabia, one of its top oil suppliers, to trade in yuan instead of dollars.

If Saudi Arabia decides to dump the greenback for the yuan, then many of its neighboring allies will do the same. This is terrible news for the anyone holding the dollar. It's not bad news for anyone holding gold.

FOUR - GLOBAL DE-DOLLARIZATION:

It’s clear that both China and Russia have begun hoarding gold. In the case of China, a gold-backed yuan would be one of the few advantages that the currency would have over the US dollar, particularly in light of the ballooning US national debt. We also heard how last week Iran decided to forego the dollar by settling a good portion of its international payments with Euro.

The main point is that many countries are looking forward to the end of US dollar hegemony. They want an end to the US dollar’s global reserve currency status. And Russia makes no secret that their gold reserves serve as a hedge against this hegemony.

In light of this sentiment, it wouldn't be so farfetched to speculate that soon enough China and Russia will have accumulated enough gold to create a currency to rival the dollar. And what would make this new currency competitive with the dollar? It would target the dollar's Achilles heel: no gold-backing.

And as the dollar loses its reserve currency status, gold, the primary element fueling the rise of its rival currency, will skyrocket in price.

FIVE - TARIFFS AND POTENTIAL TRADE WARS:

We've all felt the volatility effects of the news surrounding the Trump tariffs and talks about a potential trade war. The opening volleys have already begun, but the large-scale effect of escalation hasn't yet started.

The US imposes a higher tariff on Chinese steel, and in response, China taxes US soybeans. Retaliatory responses can escalate, going much more in-depth, hitting various aspects of the economy even harder. And that's just with China alone. We've covered in a previous article what can happen in the case of a full-scale global trade war. It’s not pretty.

In a full-scale trade war, the dollar would decline, costs of goods would significantly increase, and economic mayhem would reign across most of the world’s economies. And if such a thing were to happen, those who are not storing gold in a vault may bitterly regret it.

SIX - DECLINES IN GOLD EXPLORATION AND PRODUCTION

According to data from S&P Global Market Intelligence, gold exploration is at an 11-year low. This part is cyclical, as gold exploration and production tends to ramp up with demand when gold prices make such efforts profitable.

The problem is the no mining company has discovered any significant reserves in the last 15 years. So when gold demand finally increases, likely due to any of the above scenarios, there will not be enough gold to go around.

Global gold output has reached a plateau. And from this point on, it is likely to decline. In other words, we are well past our peak in gold production.

And with all the factors mentioned above, from debt to geopolitical tensions, gold is what’s needed now more than ever.