The global debt situation outlook is being magnified in the speculative nature of gold today. Few may know that the U.S. dollar and most fiat currency was fully backed by gold in a vault once-upon-a-time.
We have been asked recently where gold could go. While the answer is higher, the reality is that no one knows. For gold to maintain the level it’s at today, central banks may need to go back to an agreement where fiat money is backed by gold. Some have speculated and calculated that is about US$10,000 per ounce or more.
The ratio of gold to equities (S&P 500, U.S. large caps) has about 100 years of history. Prior to Aug. 15, 1971, when gold started to float again, it might not be useful as a barometer. Gold repriced in the high inflation ramp in the 1970s when stocks performed poorly. Gold performed poorly for a decade when the internet boom was driving stocks. Compared to the current peak, the 2000 internet bubble, stocks were very expensive relative to gold. But the debt situation 25 years ago was still manageable. Today, arguably, it is not!
One thing we are confident in is that governments of the world will not make good decisions with our tax dollars and they have lost control of spending. They will not likely make the hard decisions needed to fix the “books!” Gold is going higher, but it will be a bumpy road and there will be corrections along the way. At some point, I think we need to go back to a gold standard, but let’s leave that for another day. This gold rally is like none that we have seen before, so hard to tell when it ends. I’m nervously bullish as I’m not good at momentum markets.
