Dangerous debt levels may take gold prices back to $1,450 level


The gold experienced a significant historic breakout in June. At present, it has broken April 2013 high and made a fresh 2019 high. Although it failed to sustain above $1,450, but even a breach for gold is considered bullish.
From here on we expect gold to consolidate till $1,405 before resuming its uptrend. Many fundamentals point to strong gold in the coming months.
First positive fundamental factor would be the US rate cutting cycle. Second positive factor is global bonds bearing negative yields. Gold, once mocked for its lack of yield and practical use, offers something the growing pile of negative-yielding bonds doesn’t — inflation protection.
Europe’s inflation is 0.60 per cent and their bonds yield -0.2 per cent so investors could not even get a return to cover inflation.
Historically, gold has thrived during the era of rate cuts and easy liquidity because central banks use this tool to either avoid recession or take their economy out of recession.
The world economy is contracting and ECB has pledged to hold rates at a record low and the now US is looking for rate cuts, which augur well for gold.
Also supporting gold is five-year US Treasury, which has a yield of 1.6 per cent. So it’s real inflation adjusted rate is 0 per cent as US CPI is 1.6 per cent. The 10-year German Bund has fallen to record low of -0.3 per cent. So investors have no choice but to go for gold, which not only gives great returns, but at least beats the inflation.


The chart shows that last recession took place after three months when the US Fed cut rate first in September 2007. S&P500 peaked in October 2007. So we can see that the recession generally taking place after Fed starts cutting rates.


But keep in mind that recession is not the driver of gold prices. It’s the financial stress that accompanies recession, which brings a bull market for gold. Debt is the prime culprit as seen in subprime mortgage in 2008. The chart below shows how household debt has been replaced by a sovereign debt and corporate debt bubbles. Next bubble burst will come from the corporate debt. In India, we are already seeing many corporate debt bubbles getting burst such as IL&FS, Zee group, DHFL, Sintex, Cox & Kings etc.


The global corporate debt has surpassed GDP, which is dangerous. It has also peaked 2008 high. All this debt will lead to bubble burst and we may see recession again coming, which as history has shown will be a boon for gold and silver.
(Please consult your financial adviser before taking any position in the commodities mentioned)


Please enter your comment!
Please enter your name here