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Here's Why Substantial Gains in Gold Prices Are Coming

High U.S. consumer debt, D.C. political gridlock and a dangerous world make the precious metal a good bet.

With the Labor Day holiday in the rearview mirror and many schools back in session, it's time to assess where markets are and where they could be going for the rest of 2017. What are some scenarios that might occur this fall -- and how can we position ourselves to take advantage of them?

Well, there's no question that the U.S. and global economies and political scenes face some major challenges. Here's what I'm watching:

The U.S. Economy, the Fed and Consumer Debt

It's been eight years since the Great Recession officially ended, and the U.S. economy has been growing at a steady pace since then (albeit at a somewhat subdued one). Both Europe and China have been expanding as well, while Japan has at least continued to limp along.

It seems like the last financial crisis has been all but been forgotten. Equity markets trade at historic highs, while debt markets are juiced up by interest rates that remain within spitting distance of their all-time lows. Another U.S. corporate-earnings season is winding down, and companies' results have generally looked good. So, our current elevated market levels seem justified.

But things don't seem quite as rosy just below the surface. For instance, U.S. wages have been stagnant for close to two decades, while household borrowing is at all-time highs.

It seems like the U.S. economy has grown based on credit expansion from the Federal Reserve -- but the Fed is now gradually trying to remove the punch bowl. However, recent poor housing and retail statistics seem to have given Fed members pause just as they're appear ready to raise interest rates one final time in 2017.

Evidence is mounting that the extraordinary debt levels incurred since the Great Recession are acting as an anchor to the U.S. economy. The problem is that Americans somehow need to alleviate this debt burden in the absence of the inflation that central bankers have long desired.

The idea that central banks could somehow create growing economies andbeneficial inflation through money creation (i.e., debt) is losing credence. Will this autumn see the collapse in confidence that always results in a financial crisis?

 

Janet Yellen takes center stage in the second half of the year.

A (Border) Wall of Worry

The intersection of politics and the U.S. economy will soon be on full display in Washington as Congress this fall takes up tax reform, raising the federal debt ceiling and President Trump's proposed U.S./Mexican border wall.

Markets seem to have priced in a favorable outcome in the debt-ceiling debate, as there's apparently no appetite in Congress for a government shutdown. But wait -- Trump has threatened a shutdown over getting funds to build his proposed border wall.

So without provocation, a government shutdown been threatened over a seemingly settled issue. Given Trump's failure to repeal and replace Obamacare, where will consumer and investor confidence in markets and the U.S. government stand during (and after) these fights? Confidence, like markets, can be fragile.

Global Risks

There are also plenty of risks globally.

Debt levels in Europe, China and Japan are all very high, while bank failures are a constant concern on the Continent. China is also dealing with its own debt issues as it wrestles with shadow banking failures, and the Communists will soon hold a party congress to determine the nation's future direction.

Other potential surprises lurk around every corner of the globe, with North Korea, the Middle East and cyber-warfare all stubbornly remaining in the headlines. The risks are real, and we as investors must account for them.

How to Play Things

So, the question becomes one of how smart investors should position for all of the above events and risks.

"Buy low and sell high" is a simple enough concept to understand, but much more difficult to actually put into practice with stock and bond markets both at or near historic highs, as these charts show:

S&P 500 Historical Chart

https://s.thestreet.com/files/tsc/v2008/photos/contrib/uploads/7d84ee5a-8f62-11e7-952c-73947731315e.png

Source: Macrotrends

30-Year U.S. Treasury Yield Chart

https://s.thestreet.com/files/tsc/v2008/photos/contrib/uploads/90f45d4b-8f62-11e7-952c-9b15dff864ad.png

Source: Macrotrends

With both U.S. equities and Treasury bond prices high, it's prudent to sell a percentage of the portfolio at these levels and buy an asset with less risk. Precious metals represent a good risk in this environment.

Both gold and silver have enjoyed market gains this year, but are nowhere close to their 2011 record highs. With plenty of upside potential and favorable fundamentals supporting them, the precious metals are not just a safe haven to store wealth in times of stress, but a real opportunity to participate in price appreciation.

With less than 1% of financial assets invested in gold, any type of sentiment change in favor of the yellow metal should translate into substantial gains as the market develops. With both safe haven and price appreciation appeal, precious metals will be tough to beat as a solid investment for the rest of 2017.

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