Put Me on Record: Gold Will See $2,000 Before $1,000

Gold Bars Getty
Gold Bars Getty

Gold optimists finally had something to look forward to in 2016. After three consecutive years of losses, the lustrous yellow metal regained its shine and motored higher by about 9%. Of course, if the year had ended in August, gold's annual gains would have been even more impressive.

In recent weeks, though, gold has come under some of the steepest selling pressure it's seen in quite some time. In particular, gold has struggled since Donald Trump was announced as the winner of the presidential election on Nov. 8. Trump's Republican-backed policies, which focus on cutting individual and corporate taxes, as well as his personal agenda to push forward with $1 trillion in infrastructure spending over the next decade, have lit a fire under the U.S. stock market, the U.S. dollar, and Treasury yields. The result has been a complete wipeout for gold, which from its heights on election night to its lows from the previous week, lost more than $210 per ounce.

Is gold headed to $2,000?

Gold Bars On Top Of Stock Chart Getty

Image source: Getty Images.

In December, gold dipped into the $1,120s, a level not seen in more than 10 months, and just $70 above its multiyear lows. Even now, with gold having rebounded a few percentage points from its December lows, gold sits just $170 per ounce away from hitting $1,000 per ounce.

Despite this, it's my belief -- and feel free to put me on record -- that gold will hit $2,000 an ounce before $1,000 an ounce, assuming it even sees $1,000 per ounce again. Why am I so confident in this prediction? The following seven factors tell the tale.

1. Opportunity costs remain low

To begin with, the opportunity cost of owning gold remains fairly low, even if U.S. Treasury bonds have rallied a bit and the Federal Reserve has lifted its benchmark federal funds target rate by 25 basis points on two occasions since Dec. 2015.

Opportunity cost is the act of forgoing a near-guaranteed return in exchange for another asset that offers the chance at a bigger return. Bonds, bank CDs, and bank savings accounts have near-guaranteed returns, but many are also not outperforming the national rate of inflation. This leads to nominal gains but real money losses. As long as interest rates remain below their historic norms, the desire to forgo bonds, CDs, and savings accounts in favor of physical gold is probably going to be strong.

Rising Interest Rates Dollar Bill Getty

2. The Fed has been inconsistent

This leads to the next point: The Federal Reserve hasn't been very consistent over the past couple of years. Even though you'll note a very contiguous stance at 0.25% in the federal funds rate for essentially seven years before the December 2015 hike, the Fed has been vacillating between increasing interest rates and standing pat for years now. In fact, it entered 2016 with the estimated objective of four rate hikes and wound up executing only one, in December 2016.

The central bank enters 2017 with the expectation of three rate hikes, but who knows what'll happen with a myriad of economic uncertainties at home and abroad. With Yellen likely to be replaced as Fed chairperson in a little more than a year, the direction of Fed policy is still very much up to interpretation -- and that's good news for gold.

3. The U.S. consumer is spoiled

Another component that favors gold is the real likelihood that the U.S. consumer has been spoiled with historically low lending rates for far too long. There's a genuine possibility that even a minor increase in lending rates could stall the U.S. economy.

For example, mortgage applications plunged 12% last week from two weeks prior, on a seasonally adjusted basis, all as a result of rising mortgage rates. Note the part about "seasonally adjusted," because it factors in the usual holiday slowdown in mortgage applications and still demonstrates how weak the housing market has been in recent weeks. If this is the reaction of consumers to mortgage rates that are still historically low, but have increased by about 75 basis points from their recent lows, then the Fed is going to struggle to pass along future rate hikes without putting the U.S. economy into a tailspin. That's more good news for gold.

Debt Trap Ball And Chain Getty

6. U.S. national debt is a pathway to gold

While I could have easily included the United States' growing national debt in the section on Trump, national debt has been a problem long before he was elected as the 45th president. With the exception of a few years when Bill Clinton was president, the U.S. federal government is essentially always running a deficit, pushing up national debt levels. The higher the debt levels go, the more money that needs to be set aside to service the interest on that debt, which leaves less money available to spend on education, infrastructure, and defense (i.e., areas that can ignite GDP growth).

If national debt levels increase significantly under Trump, he may be forced to pare back his tax and infrastructure plans, which could hurt growth, in order to focus on balancing the federal budget. The higher the national debt goes, the more lustrous gold looks.

7. History suggests it'll do well under Trump

Finally, history is on the side of gold optimists during the Trump presidency. According to CNBC, gold tends to outperform when Republicans are in the White House. Though past performance is, of course, no guarantee of future results, it's always possible we could see buy-and-hold investors step into owning gold based on that long-term trend.

Mark it down, folks. With gold only $170 per ounce away from $1,000 per ounce, this Fool is calling for $2,000 per ounce.

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The author(s) may have a position in any stocks mentioned.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has adisclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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