Last week, the investment bank Goldman Sachs issued a note predicting gold could hit $5000 (£3700) if the Federal Reserve bank continued to be undermined and if 1% of privately-owned Treasuries moved to gold. 

How, then, realistic is this price target? 

In the note, Goldman analysts wrote that “gold remains our highest-conviction long recommendation.” £3700 a troy ounce by the end of next year would mean another 40 per cent increase in the price of gold off the back of a 38 per cent increase in the past year alone. 

Gold holders are probably wondering what needs to happen for Fed independence to be undermined? Well, it’s already happening. 

Trump has repeatedly tried to fire Fed chairman Jay Powell and recently tried to oust one of the governors Lisa Cook. He wants lower interest rates but the central bank is meant to be institutionally independent and should not set rates based on political agenda. Why are threats to Fed independence a risk for the global economy but good for gold? 

There are 2 key reasons: high inflation and doubts over the US dollar remaining as the reserve currency of the world. 

Everyone knows the typical relationship between the gold price and inflation. When inflation is high, because gold is the best store of monetary value, the gold price rises. Lowering interest rates increases the money supply in the economy by reducing the borrowing costs of new money. So, if we briefly imagine a scenario where Trump wants to look good and have a booming economy under his name, the easiest and quickest way for him to do this is to allow the central bank to print money and allow it to feed through to asset prices, resulting in higher prices for consumers and growing wealth inequality. 

The risks to this scenario are far worse than just inflation itself. We are talking about the crumbling of the entire American financial system. 

Trust and credibility are big things. Not just for institutions, but for businesses and for individuals. So much money flows in and out of the US because of the credibility of its financial institutions. His attacks on central bankers, therefore, is of serious importance in relation to the gold price. 

In true Trump fashion, tearing financial credibility up would leave investors with little confidence in investing in the US. Can you imagine if investors in US Treasuries were told by Trump “No, you cannot sell our government debt. In fact, I’m forcing you to buy more or else it’s a 100 per cent tariff for you or I will make sure you never do business in the US ever again.

I had in fact made up that quote but it does sound rather similar to his previous announcements. The point is, he’s done the unthinkable before and he can do it again. 

Many of our clients are investing with us because of their unhappiness with the bank. They are unhappy with the interest rates they are receiving, they are disgruntled at the fact they have to stay on the phone for hours just to spend their own money and they have had enough of these “capital controls” disguised in the name of safety. 

What Trump is currently doing is exactly what is happening to you but on a global scale. Just like how you might withdraw money from your bank and into gold to give you control of your wealth, countries and institutional investors will do the exact same thing and withdraw money from the US and into gold. 

And, it’s already happening! What do you think has been fuelling the gold price in the last few years? Sanctions on countries and reckless borrowing from the US has caused foreign central banks to purchase more gold. That way, they maintain control of their money and it acts as a safe reserve. In this week’s newsletter, we showed that central banks now own more gold than US Treasuries for the first time in decades. 

Goldman Sachs’ forecast is based on what I’d call the domino effect. At the moment, each domino is falling over one by one causing a steady rise in the gold price over the past few years. But, in a recent survey of 95 economists, the FT discovered the following: 

The four biggest risks are high inflation, loss of confidence in Treasuries, financial market turmoil and dollar instability. 

Trump is due to appoint a new chairman of the Fed soon, and if he cannot prove to everyone that he will remain independent, the fact is all four of these things will happen. One ought to remember that these are peculiar times. Uncertainty rife, financial security at stake, geopolitical tensions at its highest level in decades. When the irregular happens, it causes unprecedented movements in the gold price. Previous benchmarks for the gold price are no longer valid. This is a new world. You can change with it or you can take the biggest risk of all: doing nothing. 

The domino trail is set. It just needs a push from Mr Trump. When the dominos do fall, however, that £3700 forecast will be a price you wish you bought gold for.