Gold price could go 'Parabolic' says Legendary Investor

Summary:

According to John Paulson, the Gold price could be on the verge of a monumental rally, predicting inflation could lead to a 1970's style boom for bullion.

According to John Paulson, the Gold price could be on the verge of a monumental rally, predicting inflation could lead to a 1970’s style boom for bullion. Speaking to Bloomberg, Paulson, who shot to fame betting against Mortgage-backed securities in 2007, said the conditions are right for Gold to go much higher. Citing rising inflation and Gold’s limited supply, he sees similar conditions in 2021 to the late 1970s when Gold gained over 600%.

After making a mint during the Great Financial Crisis, John Paulson switched his attention to Gold, correctly guessing that the fed’s monetary expansion would lead to a substantial increase in the price of XAU/USD. However, Paulson believes the backdrop now offers an even better set-up than 2009.

“We thought in 2009, with the Fed doing quantitative easing, which is essentially printing money, it would lead to inflation. But what happened was while the Fed printed money, at the same time, they raised the capital and reserve requirements in banks. So the money sort of recycled. The Fed bought Treasuries, created money, which wound up in the banks and then was redeposited at the Fed. And the money never really entered the money supply. So it wasn’t inflationary.“

However, he explains that last year the money supply increased by 25%, which he predicts will lead to the Gold price having its best run in four decades.

Gold Goes Parabolic

“The reason why gold goes parabolic is that basically there’s a very limited amount of investable gold. It’s on the order of several trillion dollars, while the total amount of financial assets is closer to $200 trillion. So as inflation picks up, people try and get out of fixed income. They try and get out of cash. And the logical place to go is gold. But because the amount of money trying to move out of cash and fixed income dwarfs the amount of investable gold, the supply and demand imbalance causes gold to rise.“

After suffering a series of setbacks this year, Gold bugs will be desperately hoping the billionaire’s gold price prediction will play out as well as his bet against housing the housing market did.

XAU/USD Technical Analysis

The daily chart shows the Gold price has recovered almost all of the losses it suffered in the flash crash, following the better-than-expected Payrolls data earlier this month. Furthermore, the two-day flush that wiped 7% from the price will have undoubtedly shaken some longs out of their positions and encouraged systematic models to go short. This left the price vulnerable to the short-squeeze it is currently undergoing. As a result, the Gold price has reclaimed $1,800 and is making its way to the next significant resistance at $1,832. Successful clearance of $1,832 brings the long-term downtrend at $1,862 into focus. Which, if uncapped, could lead to an extension towards June’s $1916 high.

The recent price action is positive, and the outlook is brighter than last month. However, the sharp decline in August serves as a reminder to investors that the market remains vulnerable.

Should the price turn lower, XAU/USD will find initial support at $1,800. Which, if penetrated, brings horizontal support at $1,760 into play. Furthermore, a deeper correction would have the bears aiming for the $1,676 triple-bottom.