(Kitco News) - For investors who are wondering what is next for the gold market as prices hold above their 200-day moving average of around $1,850 an ounce, the math is pretty simple, according to one gold market CEO.
In an interview with Kitco News, Peter Grosskopf, CEO of Sprott Inc., said growing government debt and the Federal Reserve expanding balance sheet will continue to push inflation pressure higher and destroy the U.S. dollar's purchasing power, which in turn will push gold prices higher.
"This equation for the global economy and financial markets does not get solved without some sort of financial repression and higher inflation. And in that environment, gold is on solid footing. The math just keeps getting more and more and more clear." he said. "A few tax increases aren't going to solve the government's growing debt problem."
The U.S. Federal Reserve continues to forecast higher inflation this year that will ultimately prove to be transitory in the long term. However, Grosskopf said that he expects inflation to be more permanent than the central bank expects.
He added that investors just need to look at what is happening in the labor market to see the growing inflation threat. Although there is significant slack in the labor market, wages rose sharply in April. Grosskopf explained that workers are in no hurry to get back as they continue to be supported by government stimulus spending. He added that it would take much higher prices to get people back into the workforce.
Grosskopf added that rising commodity prices with the unprecedented move in lumber prices, copper, tin, and aluminum would eventually trickle through to consumers, making products more expensive.
"This whole notion that inflation will stay in check at 2.5% is ludicrous," he said.
Although inflation is rising, Grosskopf said that the Federal Reserve would be forced to sit on the sidelines and maintain its ultra-loose monetary policy because the fragile economy can't afford the volatility that would come with expected tightening.
Looking at bond yields, Grosskopf said that the central bank could maybe let yields rise to 1.90% before they would be forced to step in.
"The Fed is in checkmate, and this is why the gold market is still so exciting for me," he said. "They will do everything they can to keep interest rates low because they can't afford higher rates. It is only a matter of time before we see new historically low negative yields."
As to how high gold prices go, Grosskopf said that his investment firm still sees prices pushing north of $2,000 an ounce this year; however, he added that the price target is less important than the precious metal's long-term trajectory.
"The importance of gold's mandate is undeniable. The numbers are getting more and more compelling," he said.
While investors once again see potential in gold, Grosskopf said that this is just the start. He added the next evolution of the gold market would be its utility as a global currency that consumers will use to protect their declining purchasing power.
"People put their money into gold, and they hold it, but that is going to change. You will hear more conversations about digital gold and gold on the blockchain, and that will change the market in the next five years. People are going to be able to use gold very efficiently," he said.
