Gold Price Pullback But Here’s Why It’s Headed Way Higher

Key Concepts

• Gold Price Surge: The significant increase in the price of gold, surpassing $4,000 per ounce.
• Donald Trump's Presidency: The impact of his policies and disruptive nature on the economy and investor confidence.
• US Dollar as Reserve Currency: The declining but still dominant role of the US dollar and the search for alternatives.
• Central Bank Gold Buying: The trend of central banks increasing their gold holdings, particularly emerging market and BRICS nations.
• Gold Mining Stocks: The performance and potential of stocks related to gold extraction.
• Silver as "Poor Man's Gold": The correlation between silver and gold prices, with silver often following gold's movements.
• US Economy and Recession: Contrasting views on the health of the US economy and the likelihood of a recession.
• Federal Reserve Policy: The influence of interest rates and inflation targets on gold prices.
• Operating Cash Flow Multiple (Moat): A valuation metric for stocks based on their actual cash generation.
• Market Corrections and Gold Stocks: The behavior of gold mining stocks during broader market downturns.

Gold Price Surge and Trump's Influence

John Dudy, editor of John Dudy's F5 Gold, discusses the recent surge in gold prices, exceeding $4,000 per ounce. He attributes this rise, in part, to the disruptive and chaotic nature of Donald Trump's policies, which create confusion for global investors. Dudy notes that during Trump's first administration, gold increased by 55% and the US dollar fell by 10.6%. This time around, the dollar is down 9% and gold is up 50% in just nine months, indicating a faster reaction due to fewer "economic guard rails" on Trump's actions. Dudy believes this trend of investor confusion and its positive impact on gold will likely continue until Trump leaves office, or at least until the November 2026 elections if there's a shift in congressional control.

Central Bank Buying and the US Dollar

A significant driver of the gold price surge is central bank buying. Dudy explains that while the total ounces held by central banks might be relatively steady, the higher gold price inflates the reported value of their holdings. He observes a trend where emerging market central banks and BRICS nations are increasing their gold reserves, viewing it as a dollar alternative. However, Dudy cautions against expecting the US dollar to be dethroned as the primary reserve currency soon, comparing the 75 years since the Bretton Woods agreement to the 150 years it took to dethrone the British Pound. He suggests gold is only "half dethroned" in this long-term spectrum.

Is it Too Late to Invest in Gold?

Dudy addresses the common question of whether it's too late to invest in gold given its current high price. He argues that the underlying causes for gold's rise are unlikely to change unless there's a significant political shift. He reiterates that the political landscape, particularly the control of the US government branches, will influence policy changes and, consequently, gold prices. Dudy emphasizes the importance of being involved in the gold market and suggests that gold mining stocks are an even better way to participate, noting that his recommended stocks are up 160% year-to-date, significantly outperforming gold itself.

Silver and Other Precious Metals

Regarding silver, Dudy describes it as "poor man's gold," a derivative of gold that tends to rise when gold does. He confirms that silver is indeed performing as expected, along with platinum and even copper, which has reached an "amazing price" of nearly $5 per pound, a stark contrast to its price 20 years ago.

US Economy and Federal Reserve Policy

Dudy expresses a more pessimistic view of the US economy than Jerome Powell, the Federal Reserve Chair. While Powell suggests the Fed's data indicates stable inflation and employment despite a government shutdown, Dudy anticipates a recession, though he acknowledges it may take time to materialize. He states that his recession outlook does not currently impact his gold price predictions. However, he notes that if Trump were to replace Powell with someone who lowers interest rates, it would positively affect gold by potentially stimulating inflation. Dudy also mentions that most observers expect inflation to be around 3% by year-end, exceeding the Fed's 2% target.

Gold as a Mainstream Asset

Dudy reflects on the shift in gold's perception from a "fringe market" and "outcast" to a more mainstream asset, evidenced by increased coverage on platforms like CNBC. He humorously notes that despite this mainstreaming, his social invitations haven't increased. He believes gold has "a ways to go" and uses the "operating cash flow multiple" (moat) as a metric for valuing gold stocks. He observes that the average stock is trading around an 8x annual cash flow multiple, which is historically low compared to past ranges of 4x to 12x, suggesting significant upside potential for mining stocks.

Mining Stocks During Market Corrections

In the event of a major market correction or crash, Dudy believes gold mining stocks would initially decline along with the broader market as buyers disappear. However, he anticipates that if the gold price holds steady, buyers would return to gold stocks as a way to gain exposure to gold without directly owning the metal. Therefore, he doesn't foresee any long-term negative impact on gold stocks from such a correction.

Conclusion

John Dudy's analysis points to a continued bullish outlook for gold and gold mining stocks, driven by political uncertainty, central bank diversification, and the potential for further dollar weakness. He emphasizes that the current market conditions, particularly the disruptive nature of US political leadership, create a favorable environment for precious metals. Dudy also highlights the significant undervaluation of gold mining stocks based on their cash flow generation, suggesting substantial upside potential. While acknowledging the current high price of gold, he argues that the underlying drivers for its ascent remain intact, making it a compelling investment.