With the price of gold pulling back today and stocks rallying, one of the greats in the business discusses the coronavirus threat and $18,000 gold.
Worldwide Depression And Gold
January 28 (King World News) – Dr. Stephen Leeb: Here’s how I assign the probabilities for gold in coming years:
- I see more than a 90 percent probability that gold will soar over all other assets, including stocks.
- I see an 80 percent probability that those gains will be utterly spectacular, eclipsing any bull market in any asset in our lifetime.
Those are pretty compelling odds. Let me explain how I arrived at them. Basically, I see the coming investment climate as encompassing three distinct possibilities, each indicating a different outlook for gold. The first is dominated by commodity inflation. I think this is far and away the likeliest, and I am assigning it a probability of 80 percent or higher.
The next most likely is worldwide depression, i.e., major and protracted deflation in commodities and in worldwide growth. I think there’s a somewhat greater 10 percent likelihood of this.
Finally, and least likely – a less than 10 percent probability, and probably much less – is that we return to the kind of Goldilocks world of the 1990s, the last decade before China’s economic rise. If so, commodities would remain tame, while growth, if not necessarily torrid, would be solid…
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To translate these potential scenarios into the odds for gold I presented above, I looked at what has transpired so far this century and at various periods within that nearly 20-year stretch. I will be going a bit into the weeds here, but I think it is worth it, for when you step back and realize what the relationships have been in the past, you will have much more confidence in your gold positions and be much more willing to accumulate more gold – especially on weakness.
I’ll start with the past 18 months (chart), beginning in August 2018. Overall, in that period the S&P has gained about 17 percent while gold has risen more than 28 percent. But there were revealing shifts during that year and a half.
From the low in August 2018 to February 2019, gold gained about 15 percent. Deflationary fears get credit for that burst of strength. Trade tensions were heating up between the U.S. and China. The big drop in stocks in December 2018 and the accelerated gains in gold coincided with the detention by the Canadians of Meng Wanzhou, the daughter of Huawei chief, Ren Zhengfei. The market, in other words, had begun to price in a full-fledged blowout between the world’s two strongest economies and the potential for a massive economic catastrophe.
Then trade tensions eased. Stocks rose sharply, gold dipped a bit, and commodity prices rose slightly. You could label those few months a Goldilocks interlude. Goldilocks always equates to a win for stocks, a moderate uptrend in commodities, and gold being a bit of a dud.
In April and May of 2019, however, once again trade tensions heated up. Commodity prices fell on the heels of some negative Chinese headlines, stocks sold off, and gold soared by more than 20 percent, again showing its chops as a deflationary haven.
As trade tensions gave way to expectations for a Stage 1 trade agreement, commodities leveled off, stocks climbed sharply and gold eased back about 6 percent – another Goldilocks interlude…
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From early December 2019 to mid-January 2020, commodities, gold, and stocks all climbed together. The gain in commodities came to about 8 percent. That might not seem like much, but it represented, more than 1 percent a week, one of the sharpest six-week gains since the beginning of the century. Ditto for gold, which also gained about 8 percent in the same six weeks.
In mid-January, I thought we might be ready to segue into the massive bull market I expect for gold. My only slight worry was that gold might correct until it became clear that the rise in commodity prices was the real thing, which I expected to happen relatively quickly. But this concern was also a hope in that any correction in gold – which I thought at the most would be a dip to 1360 or so – would offer an extraordinary buying opportunity.
Gold Stands Tall
Then, unfortunately, the emergence of the coronavirus has led to what I hope and pray will be a brief deflationary scare. But even the action in the last week or so makes the case that when commodities are sliding and stocks beginning to falter – both signs of deflationary fears – gold stands tall.
To recap: The message of the past 18 months is that gold is a best investment both when commodities are rising and when deflationary fears are rising. That same message comes from a longer look back to the past 20 years and indeed to the last half century. Prior to 1970, gold was not a great holding during periods of rising commodities, but only because its price was fixed in a narrow band. The evidence for gold’s power in deflationary times goes a long way back. The late Berkeley economist Roy Jastram traced gold prices back to the 16th century. During virtually every deflationary period, gold was a best investment, gaining in purchasing power, while nearly every other asset was losing.
Over the next few months and hopefully weeks or days, I expect that the deflationary fears associated with the mysterious coronavirus will dissipate. Despite the frightening headlines, the virus, so far at least, appears less deadly than SARS, which occurred in the early part of the century, while China has responded more aggressively this time around. The mortality rate for SARS was about 10 percent; the mortality rate associated with the current virus has been less than 4 percent. Most deaths have been for elderly individuals with preexisting health conditions.
Still, as long as deflationary fears however unwarranted prevail, gold should prove a very safe and likely profitable haven. But I expect that to be just a prelude. Once the current fears dissipate, I expect commodity prices to begin to rise again. As was true mid-month, there may be a period similar to times in the past 18 months when they are not rising fast enough to create inflationary worries and stocks are gaining. Gold then could dip as low as the mid 1300s. If so, don’t get shaken out; rather, leap in it as a superb buying opportunity. You might not get another.
How High Will Gold Rise?
The next question is how high will gold rise once commodities take off in earnest. The history of the past 50 years offers one possible answer. Grouping together the inflationary 1970s with the recent period of commodity inflation, 2001 to 2011, you come up with a compounded annualized rate of gain for gold of about 27.5 percent. That points to a 10-year target near $18,000 an ounce.
And this target could turn out to be conservative depending on how fast resource scarcities develop. Probable resource scarcities have to be seen through the lens of China’s ever-growing economic, technological, and military strength.
These strengths already manifest themselves in the mostly synchronized growth of the developing world, whose population is roughly six times that of the developed world and whose per-capita GDP is about one-quarter that of the developed world. These huge inequalities have been around for millennia. But until early this century when China began to break out, there was no catalyst available to reduce or eliminate them. China has changed that.
If you think China’s growth has been remarkable, and of course it has, realize that what lies ahead will make remarkable seem merely ho-hum. Here is why. If the developed world just treads water, global GDP will have to multiply by about threefold for the developing world to catch up to the developed world. It will take multiple technological miracles to muster the resources to allow for that growth. We are still one or two technology breakthroughs away from making electric cars as affordable as those powered with gasoline. And those same technology breakthroughs will be necessary to store the energies – wind and solar – that come courtesy of the sun.
That’s why the only appropriate response is to laugh, or mute the sound, if someone is saying peak oil demand is right around the corner. Oil and other hydrocarbons store energy much more effectively than even the most advanced batteries technology can bring to us right now. Moreover, just as cheap oil peaked about a decade ago, expensive oil, aka fracking, is slated to peak within the next year or two. If you don’t believe me, take it from major oil service companies like Schlumberger and Haliburton. Both recently announced nonrecurring charges for permanently shutting down and repositioning oil equipment away from North American shale.
Global Scarcities And Gold
Scarcities are on the way, and oil is the most likely point where they will first appear. It is utterly clear that the only chance to manage these scarcities will be with a gold-backed basket of currencies that change hands by means of highly sophisticated blockchains. The only country that can manage that is China. It is an open secret it already has a cryptocurrency at the ready. That’s another important step among many we’ve already seen, including the Belt and Road Initiative, the Eastern oil benchmark in which oil is traded in yuan that is de facto backed by gold, and China’s establishing technology hegemony in critical areas from hypersonic missiles to cyber expertise.
I am betting that China will succeed in its growth plans. That would ensure a massive bull market in gold. But if for any reason – from climate changes to revolution – it fails, then look for the world to fall prey to debilitating deflation. That, too, would ensure a very big bull market in gold. For gold investors it’s a case of heads you win, tails you win even more.
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