Perfect Storm Brewing For Gold's Multi-Year Bull Market - Diego Parrilla

(Kitco News) - According to one acclaimed author and economist, a perfect storm is brewing in financial markets that will lead to a multi-year bull run for gold.

Monday, in a commentary in the Financial Times, Diego Parrilla, precious metals specialist and co-author of “The Energy World is Flat,” said he is bullish on the yellow metal as the limits are being tested in global monetary policy, credit markets and the boundaries of fiat currencies.

“Quantitative easing and negative interest rates have been game changers and have dramatically distorted the valuation of government bonds, breaking the theoretical ceiling in prices, squeezing shorts and underweight positions, and feeding what, in my view, is one of the largest financial bubbles in history,” he said in the commentary.

Parrilla’s comments come as gold prices try to hold on to recent gains as markets reprice expectations for Federal Reserve interest rate hikes at some point this year or early 2017. December gold futures last traded at $1,347.30 an ounce, up 0.45% on the day.

Currently, CME 30-day Fed fund futures are pricing in about a 47% chance of a rate hike by December; at the same time, there is a 54% chance of a 25-basis-point hike by March 2017. The rising expectations is helping to boost the U.S. dollar, which Parrilla acknowledged as gold’s biggest competitor.

However, Parrilla comments show he is wary about any potential move from the U.S. central bank and sees the “door wide open for gold to retake its reserve currency status.”

While many analysts have noted that negative interest rates have been positive for gold as it reduces the precious metals’ opportunity costs, Parrilla sees the market a little bit differently. He noted that ultra-loose monetary policy has led investors to aggressive risk taking and is created bubbles in credit and bond markets and there is growing risk of these bubbles bursting.

“The bubble in government bonds and duration has incentivized risk-taking across equity and credit markets, lending to weaker and weaker credits, often ignoring or underplaying the risk of capital losses, liquidity and volatility,” he said. “The current path of monetary and credit expansion is unsustainable and will eventually burst, leaving investors struggling for ‘the return of their capital, instead of return on their capital,’ an extremely bullish scenario for gold and other real assets.”

By Neils Christensen of Kitco News; nchristensen@kitco.com