The American government is facing a monumental challenge getting its debt mountain under control. This prolonged grappling with the national balance sheet means that there is “tremendous upside potential for gold” according to experts.
Fund manager, James Lavish says that a systematic credit event could force the Federal Reserve to liquidate billions of dollars, thereby triggering a rise in inflation and pushing the gold bulls to historic price levels. Lavish estimates that the Feds have already liquidated around £495 billion ($600 billion) in recent weeks in response to rising long-term Treasury yields.
What’s more, this kind of activity is already beginning to trigger warning bells. “We’re seeing investors pull back and say: ‘Hold on, that’s too much debt. There’s no way that we can keep up with this’,” he explains. “They [the Federal Reserve] are concerned that they’ll have to step in and do what’s called yield curve control and have the Fed enter and start buying in the open market again.”
This is a hugely risky move and has markets balanced on a knife edge Lavish warns. He adds, “The problem is that it can be so big or so far-reaching that it has a danger of what we call contagion, which affects other companies. And if that happens, then you see the whole market drop. That’s the danger.”
A contagion would lead to a domino effect which would have wide-reaching consequences – and would power the gold bulls to historic highs.
“The credit event would be a situation where you have a high probability of contagion from counterparty risk between large banks or large institutions. It would force a market sell-off in virtually everything,” Lavish projects.
“You have this V kind of a drawdown on a market event like that. And then the recovery comes when the Fed and the Treasury push tremendous liquidity into the market to make sure that it doesn’t collapse,” Lavish described. At that moment, there is an unprecedented opportunity for gold prices to increase exponentially.
Many investors are drawn to the precious metal in times of uncertainty – something we have seen happen time and time again over the last few years. “Gold is a good save haven for at least the next 3 years, as this [fiscal] uncertainty and the fed printing money plays out,” Lavish concludes.
In trading yesterday (Thursday) gold was just shy of the critical £1,650 ($2,000) threshold with further prices rises likely. You can’t afford to wait for prices to smash through that ceiling and climb to new all-time highs. Buy now.
