You may have noticed that whenever the gold price picks up steam, some in the international media spring into condemnation. The fact that a shiny metal should be favoured over paper money (though equally redundant in its purely physical aspect) sparks their concern. The reason is that they specifically want savers to lose out relative to spenders, in the quest for economic momentum. The use of gold, then, is a snag in that stratagem.
Gold is quiet right now, but its relative slumber may not last if the latest round of deflationary global numbers leads to further desperate official measures worldwide.
Many years ago in these pages I speculated that policymakers might eventually want to penalise holdings of gold because those hoping to retain wealth by such means were defying plans to transfer private resources to the impoverished state.
The notion might seem far-fetched, but the workings of the elitist mindset means it’s not beyond possibility. That’s clear with the increasingly frantic arguments put forward by those whose view of the economic imperative in today’s difficult circumstances is to recycle household and business finances.
Recently an influential observer argued that the Swiss national bank should not have dropped its peg with the depreciating euro but instead hitched its wagon differently, by imposing deeply negative interest rates. He even contemplated restrictions on people who hoped to preserve their purchasing power, to prevent them from removing money from their bank accounts!
With such dangerous and punitive thinking around — and medium-term sovereign (and even corporate) bonds now also sporting negative yields — it is no wonder that gold remains on the investment radar. If they are prepared to tolerate the price volatility that a non-yielding asset carries, buyers may well view the precious metal as a long-term store of value, despite its historic, short-term volatilities.
So how to read gold at this point? As an investor, would you imagine another bull run based on the evident chaos at the heart of the world’s cash-based monetary systems?
As discussed in the past, gold’s enemy is the general idea of the world economy ‘muddling through’, with neither deflation nor inflation posing a significant threat. Lately the prevalence of that condition has explained the metal’s retreat from its sharp peak in excess of $1900 in 2011. Europe’s latest existential struggle, however, disturbs that status quo.
The point about deflation, meanwhile, is not that falling prices help gold per se by harming cash, since evidently that’s not so; quite the reverse. It’s simply that the unacceptability of deflation to policymakers makes further attempts to create inflation more likely. What recent years have shown, however, is that those efforts, albeit concerted, essentially haven’t succeeded.
So now the issue is whether the willingness of the authorities to throw everything — including the kitchen sink, and more particularly the enduring value of private savings — at trying to restore inflation will eventually prevail (as was previously assumed), or whether their prior failures indicate that the strategy itself won’t work, whatever its level of intensity.
Currency wars
Some might say, in fact, that the safer ground between these two possibilities is narrowing, and that it’s better to add gold to your portfolio anyway on such shifting sands. After all, there could easily now be a resumption of the “currency wars” market theme, as the main economic blocs try to squeeze out any advantage competitively by means of printing cash and pursuing exchange devaluation.
That said, there are other hugely important players in this game, in particular China and India, the biggest consumers. Since it is a key facet of gold that it is not produced at the whim of central banks or governments in the same way that currencies are, then the stance of those on the demand as well as the critically-restricted supply side matters most.
Both these dominant Asian nations are willing to keep buying gold either at official or street level, and in very meaningful quantities, whether for financial reserves or traditional reasons. Neither have been cited much recently for moving the market, which has traded in the $1200-1300 region for most of the past two years. But they can perhaps be relied on to step in with purchases if the price dips noticeably from here.
One key issue colouring the outlook now is the suggestion that US interest rates will rise in the foreseeable future, removing a key plank from gold’s attraction, namely the absence of an opportunity cost to holding it when there are near-zero income returns elsewhere.
It’s a fair assessment, though, that such is the isolation of the US growth story relative to debt-encumbered sluggishness among other economic blocs, that the dollar’s rise itself may impart sufficient tightening on the economy. Which would delay rate hikes, and, if the resulting slowdown itself weren’t too onerous, clear the way for gold to beat an upward path again.
