The Countdown to $1,519 Gold

Gold and miners are on the launch pad. I say this despite a two-week pullback in both the metal and mining stocks. That’s fine. It means we have a chance to buy great stocks at bargain prices.

I have said and will keep saying that gold doesn’t travel in a straight line. It zigs and zags. But one thing is for sure: Gold is in a new bull market. It has been since February. And corrections in a bull market are an opportunity to buy.

I’ll explain the forces driving the bull market. First, why am I calling a “new bull” in gold, anyway? Because gold is cyclical. It came out of a 52-month brutal bear market that ended in January. Now it is time for gold bulls to shine.

Looking at the chart, you can see gold has bottomed. This recent correction is just a wobble in a strong move higher.

In just a bit, I’ll tell you about something that could kick this golden rocket into overdrive.

Supply and Demand

Again, gold is cyclical. A lot of this is due to supply and demand. As gold prices go lower, mines shut down and new projects are canceled. Production goes down.

According to Thomson Reuters’ GFMS, global production of gold is expected to fall 3% in 2016. That will put an end to seven years of rising output. By 2018, GFMS expects that global gold mine production will fall by around 315 metric tons.

Meanwhile, demand is soaring. Globally, total demand for the yellow metal rose to 1,050 metric tons in the second quarter. That’s a rise of 15% year over year.

Bar and coin demand actually doubled year over year. And ETF inflows surged.

Holdings of gold in bullion-backed ETFs are currently at 65.3 million troy ounces.

Now, that’s not close to the highs set back in 2013. But that just means there’s plenty of room for investors to add to holdings.

Beyond the supply-demand squeeze and investor demand, I could talk about many forces driving gold higher. The growing middle class in Asia, rising worries about the euro and the global financial system, and purchases by central banks all play their part.

But there is a new force in the market that is potential rocket fuel for gold prices.

I’m talking about negative interest rates.

A New Force in the Market

I told you back in May about how negative interest rates are lighting a fire under gold prices.

The reason is there is normally a “carrying cost” to gold. That is, the money you invest in gold could earn you interest in bonds. And gold doesn’t pay interest.

But now, many government bonds across Europe and Asia don’t pay interest. In fact, many sport negative yields.

Governments around the world are issuing trillions and trillions of dollars of government bonds that offer negative yields. These bizarre bonds pay no interest to the bondholder; they charge interest to the bondholder.

And negative-yield debt is ballooning like some monstrous zeppelin.

• In February, there was $5.5 trillion in negative-yielding debt.
• In June, there was $10.4 trillion in negative-yielding debt.
• And now? The value of negative-yielding debt has soared to $13.4 trillion!

Until now, the only ones feeling the pinch of negative interest rates were buyers of government debt in Europe and Asia, as well as big banks.

But that’s changing.

In a recent article for The Non-Dollar Report, I wrote:

Negative rates haven’t percolated through to most savings accounts yet, but consumers across Europe and the world can see that’s coming. So if negative interest rates are becoming the new normal, gold could be seen as a high-yield asset.

And now, guess what? Just like I predicted, negative rates are finally being passed along to companies and consumers.

The Royal Bank of Scotland says it will charge some corporate customers for holding their money.

Meanwhile, a German savings bank, Raiffeisen Gmund am Tegernsee, said that it will start charging retail customers to hold cash, according to Bloomberg reports.

But what choice does the bank have? The European Central Bank initiated negative interest rates two years ago. And the ECB has since cut its deposit rate – what banks pay to park excess funds there overnight – three times more.

Sure, that’s just one bank. But if you don’t think that’s a test case for other banks, you’d better wake up and smell the coffee.

And if people start to get charged for the cash they have on deposit, that rips the lid off the carrying cost on gold. I predict gold ownership will soar.

After all, if done correctly, at least owning gold won’t cost you money – unlike owning government bonds in Berlin or Paris.

The “race to the bottom” in yield is likely to only get worse.

For example, the Bank of Japan set a rate of -0.1% on some deposits, and it shows no signs of blinking. In fact, Bank of Japan Governor Haruhiko Kuroda said in press reports that Japan’s negative rate policy has not reached its limits.

“The degree of negative rates introduced by European central banks is bigger than Japan. Technically there definitely is room for a further cut,” Kuroda said.

All Eyes on the Fed

How about the U.S. Fed? Janet Yellen and her Fed governors may talk a tough game about raising rates. They may even be hinting they’ll raise them in September. But the U.S. Fed has been “on the cusp” of raising interest rates several times, only to flinch at the last moment.

Here’s what I predict…

If the Fed does raise rates in September, it will be one and done. And the gold markets will feel a weight lift.

If the Fed doesn’t raise rates in September, it will have cried wolf too many times. Gold will head higher anyway.

My target on gold is $1,519. I think we’ll be there by the middle of next year.

But the real winner in that rally will be select miners. They’re leveraged to the underlying metal.

The countdown is coming. Prepare yourself.

Good investing,

Sean

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