The equities market has performed well since the recent presidential election, but many analysts and economists are predicting that a major correction—or even stock market crash—is imminent. Ironically, the very factors that have enabled the market to flourish will ultimately contribute to its downfall. When they do, gold prices will rise to reflect the yellow metal’s true value.
The Grand Illusion
Historically, the free markets have played a vital role in setting prices; however, unprecedented events can interfere with their influence. The world is experiencing such a situation today with the artificially controlled interest rates put in place after the 2008-2009 economic meltdown. Now moving into the second decade of these central bank actions, the economies of several governments and the operations of many businesses are propped up by these unsustainable practices and a debt crisis is looming.
The grand illusion existing today is the ongoing rise of prices in the equities markets. Utilizing an exceptionally cheap cost of capital, many companies have expanded operations and made acquisitions that cannot continue at normal rates. Likewise, most major countries have embarked on unprecedented deficit spending and debt issuance to spur their economic recoveries.
Pay No Attention to the Man Behind the Curtain
The too human supposed wizard who so famously cried out that his visitors not look behind the curtain in The Wizard of Oz is an apt metaphor for much of today’s seemingly good, while still limited, economic news. That look beyond the curtain would quickly reveal some disconcerting realities:
- Companies reporting strong profits are able to do so due to years of quantitative easing and other forms of market manipulation. 1
- Without such artificial support, these companies would see a significant drop in earnings and prices of their shares.
- Once that support is removed, investors who are chasing gains in equities will see their long-term returns decline.
Global debt has reached a historic level that is not sustainable. These are only a few examples of what affects gold prices and why they are set to rise soon. The sentiments of post-election U.S. traders have blinded them to many of the realities shaping the future of the price of gold, and those factors will drive prices higher as the markets do their job of correcting artificial influences.
Strong Gold Performance
It is especially interesting to note that despite the recent run-up in equity prices and historic market manipulation, gold has still outperformed the markets during this century. The yellow metal has actually returned 86 percent more than the market if indexed as of December 31, 1999. 2
As savvy long-term investors in gold realize, the impending stock market crash will ensure a hefty increase in the price of gold. When the other factors affecting supply and demand are added to the equation, the performance of gold over the coming months will be impressive indeed.