by Marin Katusa, Katusa Research:
If you think big gold stock gains are behind us, think again.
Although gold stocks have climbed 100% off their late 2015 bottom, they have at least 200% upside from here. Owning gold stocks is still one of the smartest trades you can make right now.
There are two simple reasons why gold stocks will most likely be much higher in a few years: Government insanity and leverage.
I’ll start with the first reason, government insanity…
I could just mention the first debate between Trump and Clinton and leave it at that. But I want to explain the importance of understanding the deranged fiscal policy of all the central bankers and how it has resulted in financial heroin
Eight years ago, governments around the world faced a desperate situation. The world’s financial system was about to collapse. The response was extreme… and unprecedented in world history.
For the first time ever, the world’s central banks acted in a concerted manner to create oceans of money and credit. Their agreed upon goal was to “paper over’ their debt problems. Trillions of new currency units in the form of U.S. dollars, Japanese yen, Chinese renminbi, Euros, and other currencies were created and borrowed.
This monetary experiment is still going strong. Nobody, including Fed Chair Janet Yellen, know how it will turn out.
However, not one government did a thing to confront the root problem. We have a global monetary system that is backed not by real wealth, but by IOUs and faith. This faith-based “funny money” system allows governments to spend and borrow nearly limitless amounts of money… which constantly produces currency debasement and huge market distortions. In other words, over the past eight years, governments treated a heroin addict with more heroin.
Over the past few years, a new form of heroin has appeared on the scene. You’ve probably heard of it. It’s called “negative interest rate policy,” or NIRP.
In a healthy economy, you get paid to lend money to the government. In the past, you could buy a government bond and earn 5% or 6% in interest.
But the global economy is not healthy right now. Governments in the U.S., Europe, and Asia are desperately trying to jump start their economies by employing very low or even negative interest rate policies. In a negative interest rate environment, you get charged a negative interest for saving money. There is now over $10 trillion of outstanding government bonds with negative interest rates.
Politicians believe that making it unattractive for people to keep money in the bank will cause people to save less money. Instead of saving, they’ll spend money on cars, gadgets, and vacations. They’ll invest in things like real estate and stocks.
Hopefully, all that spending will “stimulate” the economy.
This thinking is crazy. The facts are proving the central bankers are wrong and the global economy is slowing.
No matter what the government does, it can’t force you to spend money. It can’t force you to buy stocks. Negative interest rates also promote all kinds of crazy financial decisions. When borrowing money is ridiculously cheap, people will borrow incredible amounts of it in order to speculate in real estate, stocks, and commodities.
I believe that over the long-term, negative interest rates will cause many currencies to plummet in value. They could even cause a financial crisis more severe than the 2008 crisis.
The asset that will soar in that environment is gold. Gold is the currency that governments cannot debase. It is the only currency that is not someone else’s liability.
With interest rates negative or near zero, there is no “carrying cost” for holding gold. Since gold pays no interest, gold owners typically “give up” interest income they would earn by owning conventional currencies.
NIRP is a financial cancer that will consume savings you hold in cash. NIRP cannot eat your savings if you store it in gold.
As paper currencies decline in value, more and more people will buy gold. That’s why I believe $1,500 gold… and eventually $2,000 gold is in the near future.
This brings us to the second reason gold stocks have huge upside from here: Leverage.
You probably remember leverage from high school science. A lever allows you to get a very powerful result by applying only a modest amount of force–think of how a crowbar works.
In the financial markets, leverage occurs when the price movement of one asset results in the amplified movement of another financial asset. Knowing how to use leverage properly can make you a fortune in the natural resource market.
Leverage is easy to understand when you think of it in terms of a house…
Let’s say you put $50,000 down to buy a $250,000 house.
A few years after you buy the house, its value has increased by 20% to $300,000.
Although the increase from $250,000 to $300,000 is just 20%, you’re actually up 100% ($50,000) on the original $50,000 down payment.
Because of leverage, a 20% gain in the value of the house translated into a 100% gain on your capital.
Leverage in gold stocks works in a similar way…
Let’s say you own a gold mine. You produce one million ounces per year. When you add up all your costs like equipment, fuel, insurance, and labor, it costs you $1,100 to produce one ounce of gold. Since gold is selling for $1,300 an ounce, you make $200 per ounce in profit.
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