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The conditions are met for the price of gold bars to double

 


The gold bar has not done what it has done in the last month since 2008.

Midas metal
GC00,
+ 0.34%

posted a rapidly increasing relative performance compared to the CRB index, industrial products collapsing due to the effect of coronaviruses. Gold bars remain firm, close to an absolute multi-year peak. This dynamic has resulted in bullion recording an absolute record compared to the CRB index (see graphic).

What happened to the gold bar after recording its previous historic record compared to the CRB in 2008? It doubled in absolute terms to reach a peak above $ 1,900 in 2011 (see graphic).

We currently have a similar environment. Interest rates have been brought down to zero at federal funds rates, and the federal deficit will exceed 10% of GDP (larger than after the 2008 crisis) due to the $ 2 trillion bailout . Record deficit spending and the quantitative easing of federal reserves (QE) without pre-established limits constitute the ideal environment for gold bullion.

The difference from 2008 is that it is a government-imposed recession. The government must stop the economy in order to stop the coronavirus. It’s like turning off the breaker for an entire house and having backup power for only part of the house. In the United States, GDP growth in the second quarter will drop double-digit between 20% and 40%. GDP figures are reported on an annualized basis, so if U.S. GDP is down 10% from the previous quarter, it would be down 40% on an annualized basis. Third-quarter GDP in the U.S. could double-digit due to the same calculation, if the U.S. government has managed to flatten the infection curve.

With record deficits and zero interest rates, we may be faced with an environment where the Fed will keep interest rates below inflation for some time until the economy recovers. normalizes after control of the outbreak. It would be the perfect environment for gold bars.

Beware of other precious metals

The other major precious metals, silver, platinum and palladium, fell much more than gold bars in the past month, although they rebounded. Indeed, they are mainly used for industrial purposes; only gold bars have the majority of them used for precious purposes like jewelry and the store of value. If the government-imposed global recession is not over soon, industrial precious metals are expected to continue to underperform.

Among the industrial precious metals, silver is the most interesting. It is also at a record discount compared to gold bullion if we look at the famous gold-silver ratio, which rose to 125 in the extreme March, which is a historic record. This means that one ounce of gold could buy you 125 ounces of silver, although we fell on this indicator because the silver bounced.

Because money is more industrial than precious, if the coronavirus recession lasts longer, it will take longer to rebound. Either way, it probably offers an opportunity for investors with a two-year horizon. The Global X Silver Miners Exchange Traded Fund
SIL,
-6.63%

looks interesting on withdrawals, as well as the iShares Silver Trust
SLV,
-0.66%
.

Stay away from leveraged ETFs

The March panic sale on the stock market painfully reminds us that leveraged ETFs are reserved for brokers and not for buy-and-hold investors. Losses can drop and multiply by a factor of three on a daily basis, and there will be no return for leveraged investments like Direxion Junior Gold Miners Index Bull 3X stocks
JNUG,
-21.73%

or Direxion Gold Miners Index Bull 3X shares
NUGT,
-16.02%

(see graphic).

On the other hand, ETFs without leverage from gold miners can be attractive. VanEck Vectors Gold Miners ETF
GDX,
-5.72%

and its junior-minor version
GDXJ,
-8.64%

sold near the levels where they were when the price of gold bullion was close to $ 1,200 an ounce.

If there was ever a case of throwing the baby out with the bathwater, GDX and GDXJ would be. But I never believed that the financial markets are efficient, so this is an opportunity to use them to your advantage.

Ivan Martchev is an investment strategist with an institutional fund manager Navellier and associates.

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