Gold Price Targeted at $20,000 as Fed Powerlessness Fuels Bullish Outlook

Kevin Smith, founder and CEO of Crescat Capital, believes gold prices are headed for $20,000 an ounce due to expanding global money supply and unsustainable government debt. Despite a significant correction from its record high, Smith says the fundamental monetary forces supporting gold have only strengthened.

The gold market got ahead of itself in January and February, according to Smith, but he believes the Federal Reserve is powerless to fight inflation because it's captured by fiscal imbalances and needs to keep interest rates low. He argues that investors have priced in an overly hawkish monetary policy outlook, which will not materialize.

Crescat made a similar argument in its July report, saying investors have priced in an overly hawkish monetary-policy outlook. The firm argued that mounting fiscal imbalances have pushed the U.S. into an era of fiscal dominance, where monetary policy is increasingly being used as a debt-management tool rather than a credible mechanism for controlling inflation.

Smith sees central banks' demand for gold as a key component of the bullish outlook, with them having purchased an average of roughly 1,000 tonnes of gold annually during the past four years, double the average pace of the previous decade. He believes this trend will continue and that the United States could eventually be drawn into the global competition for bullion.

Crescat's $20,000 price target is based on two independent macro models, including one that compares global M2 money supply with the world's above-ground gold stock. This model assumes gold increasingly reasserts itself as the de facto backing for the global monetary system as central banks continue accumulating the metal.

Smith also emphasizes the importance of mining equities, particularly exploration companies that have dramatically underperformed the metal during the past 17 years. He believes explorers could ultimately benefit from both rising metal prices and renewed merger-and-acquisition activity.