Gold hit a 27-year high last week in response to the Fed’s 50 basis points cut which showed that the central bank was more concerned about economic growth than restoring confidence in the US dollar. The economy is on the path to a recession and it looks like the Fed and the government will do everything in their powers to prevent it, and in the process, devalue the dollar against other currencies and gold.
Earlier in the year, I was a net seller of gold stocks (as discussed here and here) due to my fear that a liquidity crisis would soon develop and all assets, including gold, would endure some short-term weakness. The liquidity crisis did occur, and though gold held up well, junior gold explorers have declined by 30% to 50% since August. While I am still pessimistic on a significant rebound for bonds and equities, gold should see gains thanks to the Fed’s expansionary monetary policies.
I have now started to increase my position in gold juniors and will continue to do so in the coming weeks until I am fully invested in the sector again. The gold price may pullback, but the gold juniors have been beaten up so badly that a lot of the risk is gone. I am more confident than ever that we will see $1000 gold within the next couple of years and I want to position my portfolio again to benefit from that.