My late father was unashamedly a Gold Bug. I think it might have had something to do with his father railing against FDR when he issued Executive Order #6102. This decree issued by the President on 5/1/1933 required U.S. citizens to turn over their privately held gold coins and gold bullion. I don't believe I have reached Gold Bug status, but I find my interest waxing in that precious yellow metal that we can now legally buy and hold. Gold has experienced dramatic valuation increases over the past couple of years, but I believe there are both short-term and long-term tailwinds to further support higher prices. I detail these factors below:
Short-Term Factors -
1.) Due to the impact of the 2008 Global Financial Crisis on banks, a policy known as Basel III was introduced to improve the banks' ability to handle shocks from financial stress. Effective 7/1/25, under Basel III, gold will be classified as a Tier I Asset, joining cash and government bonds under bank capital regulatory requirements.
2.) The annual BRICs Summit will be held July 6th and 7th in Rio de Janeiro. Representatives from Brazil, Russia, India, and China, as well as representatives from another half-dozen member countries, will be in attendance. It's anticipated that work will continue with the development of an alternative to the U.S. dollar for settlement of global trade. This new currency would be backed by a basket of commodities, primarily oil and gold.
Long-Term Factors -
1.) The average American retail investor holds less than 1% in gold in his investment portfolio. The big buyers of gold in recent years have been the world's central banks and Asian (primarily Chinese and Indian) investors. With a prod from Wall Street, I expect at some point more American retail investors will increase their holdings in gold.
2.) With the failure of DOGE and the apparent inability of the Trump Administration and a Republican-controlled Congress to rein in profligate government spending, the United States economy continues on a collision course with a reckoning. The only question that remains is when it finally goes off the rails. It doesn't take a rocket scientist to see where this is headed. The powers that be will be faced with two choices. The first option would be a direct default on government debt. Owners of U.S. Treasury bills, notes, and bonds would receive a "hair-cut" and not receive the full amount of principal and interest promised in the debt instruments. Although this would be the preferable approach, our leaders will not choose this route. No, they will opt for a gutless, sneaky, indirect default. The playbook that will be used is familiar to those who closely follow the capital markets. The Fed will reintroduce ZIRP (zero interest rate policy), followed by a couple aggressive rounds of Quantitative Easing (QE). The Fed's balance sheet will go from $6.5 trillion to something like $15 trillion. This flood of liquidity and boost to the money supply will goose risk asset (primarily equities) valuations to super-bubble levels. Financial repression and yield control measures will be imposed by The Fed and U.S. Treasury. Although nominal interest rates will be extremely low, real interest rates will be positive, and maybe significantly positive. The creation of inflation and the continued debasement of our currency offer an escape hatch for the gross negligence perpetuated by our government. A few years of artificially repressed interest rates combined with high inflation can do wonders for a country's unsustainable debt levels. Creditors, especially holders of long-duration U.S. Treasuries, will take it on the chin. The government will never accept responsibility for a situation that it alone created. Like the 1970s, the dollar could lose 75% of its purchasing power over the decade of the 2020s. Gold and other hard assets that can't be printed will shine.
As I wrap up this diatribe, it would be a good idea for me to issue a couple of final comments, or maybe disclaimers would be a more fitting word. I am not taking the position that everybody should run out and buy gold and/or gold derivatives. Different people have different investment preferences at different times for their respective portfolios. What I am saying, however, is that it would be advisable to at least have a conversation with your financial advisor concerning the pros and cons of gold. Lastly, some investors hold gold for speculative (make money) reasons, and some investors hold gold for insurance purposes. Homeowners insure their residence in the event it burns to the ground. Some investors, including me, hold gold in the event the American dollar burns to the ground.
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