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This Is the Real Reason Gold Prices Are Surging

Last Updated September 25, 2020 8:41 PM
Chinmay Pandya
Last Updated September 25, 2020 8:41 PM
  • Gold prices have smashed all-time highs.
  • Not only is gold demand soaring, but the U.S. dollar is losing value even faster, thanks to the Federal Reserve.
  • Expect gold to continue rising in the coming years.

Gold prices have taken out all-time highs with ease. Not only has bullion smashed through the $2,000 ceiling, but it has stayed above that level for four days, which is very bullish.

Gold spot prices.
Gold surges to new all-time highs. | Source: Tradingview 

While gold is trading consistently above all-time highs, the U.S. Dollar Index (DXY) has seen a 10% decline since March. This came after it topped out near 103 levels.

U.S. Dollar index.
The dollar index has fallen rapidly since March. | Source: Yahoo! Finance 

While physical gold demand has been a driver of the precious metal’s rally, the real rocket fuel has been debasement of the U.S. dollar by the Federal Reserve.

That debasement could continue for a while longer. 

Gold Is Surging Because Dollar Is Losing Purchasing Power

The Federal Reserve’s monetary policy to save the U.S. economy from collapse is centered around debasing the dollar.

As attempts to stimulate spending with lower interest rates have failed, the Fed has resorted to flooding the economy with dollars.

M2 money stock data.
The money supply has shot up during the pandemic-induced shutdown. | Source: FRED 

The U.S. dollar is a fiat currency that is only backed by the goods and services produced in the economy. You cannot just print it like a piece of paper and distribute it, thinking it has value.

In his podcast on Wednesday , Peter Schiff described how the inverse relationship between the U.S. dollar and gold might affect the average U.S. consumer:

While gold continues its rally, its not a cause for celebration. Gold’s move portends extreme economic hardship for the average American.

Meanwhile, there are reasons to believe the Federal Reserve won’t stop debasing the dollar anytime soon.

A tweet by twitter user.
It looks like the Fed will have to expand its balance sheet further. | Source: Twitter 

As $8.5 trillion worth of U.S. treasuries will be maturing at the end of next year,  the Federal Reserve will have to ramp up monetary stimulus to cover it.

This is very bullish for gold prices, as the average consumer will look to preserve their purchasing power.

Inflation Will Fuel Gold’s Continuous Rally

As currency debasing boosts gold’s value, the fact that bullion is a Giffen Good could propel the rally even further

Video: What is a Giffen Good?

The law of supply and demand states that demand for a commodity decreases when its price rises. In the case of gold, this law is reversed.

When the average retail investor notices the gold prices shooting above and beyond $2,000, they will look to jump in. The fact that the U.S. dollar they hold is continuously losing purchasing power will be another reason to switch to gold.

As the Federal Reserve and central banks around the world continue to debase their currencies, there is still a lot of room for gold prices to surge.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author holds no investment position in the above-mentioned securities.