By Paul Ploumis 26 Jun 2015 Last updated at 04:12:57 GMT
(Kitco News) - Unprecedented global monetary easing is expected to drive inflation higher, and expand the current bond market bubble; and in this environment, one European fund says gold and mining stocks could benefit.
Thursday, Liechtenstein-based Incrementum AG released the ninth edition of its In Gold We Trust report, which highlighted some of the factors driving gold in 2015. Although there appears to be more downside risk to the gold market, the firm said that it is expecting prices to climb to $2,300 by June 2018.
"We are firmly convinced that gold remains in a secular bull market that is close to making a comeback,” the report said. “The main reason why we are not abandoning our fundamentally positive assessment of gold is the continuing combination of obvious over-indebtedness, expansionary fiscal and monetary policies, and the ironclad determination of policymakers to generate price inflation.”
Although the long-term outlook is positive for the yellow metal, the authors at Incrementum, Ronald-Peter Stoeferle and Mark Valek, added that they could not rule out another test of the recent lows in the near-term. They said they are looking for a final selloff to re-test support at $1,140 an ounce before there is a long-term rally.
The report explained that gold has been in its four-year downtrend because of increased focus on the Federal Reserve, which has caused a tightening of credit spreads, flattening of the U.S. bond yield curve, slower growth of the U.S. monetary supply, stronger equity markets and higher opportunity costs.
However, although gold has suffered against the U.S. dollar, it has managed to make considerable gains against other world currencies because central banks around the world are loosening their monetary policies, debasing their currencies to promote growth.
According to the report, this year 25 central banks have lowered interest rates. “There has never been before a comparable era of global zero interest rate policy.”
The authors noted the Federal Reserve is the only bank in a position to raise interest rates this year.
Although markets are expecting interest rates to push higher at some point this year, the report noted that the widening monetary policy gap will make it difficult for the U.S. central bank to pull the trigger on a new tightening cycle.
"As long as de facto every other major central bank prolongs its zero interest rate, resp. negative interest rate policy, we regard a significant deviation by the Federal Reserve as unlikely, as the upward revaluation pressure on the U.S. dollar would be too great, which in turn would definitely have negative consequences for the fragile U.S. economy,” the report said. “As a result, we consider the narrative of an isolated U.S. rate hike cycle to be naïve.”
Incrementum not only expects gold to benefit as an inflation hedge, but also as a hedge against the growing potential of a currency crisis.
The report explained that another result of the global monetary easing is that government bond markets are in expanding “bubbles” and investors could jump back into gold as these markets pop. They noted that rising inflation will ultimately push bond yields higher and spark a selloff in bonds, where “the potential for losses is enormous.”
"Ultimately the bursting of such a bubble can be averted by launching an ‘infinite QE program’. This means, however, that sooner or later, confidence in the currency will evaporate and it will lose all purchasing power,’ the report said.
Courtesy: Kitco News