What is the case for Gold?

It is time to look again at a subject which pops up every now and then and this morning has done exactly that. From The Guardian

The price of gold hit $1,865 per ounce for the first time since September 2011 this morning.

Gold has surged by 20% since the depths of the pandemic, and some analysts reckon it could hit $2,000 for the first time ever.

A weak dollar is good for gold, given its reputation as a safe-haven from inflation and money-printing.

Let us start with the price noting that this is a futures price ( August) as we remind ourselves that there is often quite a gap between futures prices and spot gold these days. That leads to a whole raft of conspiracy theories, but I will confine myself to pointing out that in a world where interest-rates are pretty much zero one reason for the difference is gone. Strictly we should use the US Dollar rate which is of the order of 0.1% or not much.

Actually a rally had been in play before the Covid-19 pandemic as we ended 2019 at US $1535 and the rallied. However like pretty much all financial markets there was a pandemic sell-off peaking on March 19th a date we keep coming back to. My chart notes a low of US $1482. Since then it has not always been up,up and away but for the last 6 weeks or so the only way has indeed been up. Of course there is a danger in looking at a peak highlighted by this from The Stone Roses.

I’m standing alone
I’m watching you all
I’m seeing you sinking
I’m standing alone
You’re weighing the gold
I’m watching you sinking
Fool’s gold

What is driving this?

Weak Dollar

The Guardian highlights this and indeed goes further.

Marketwatch says the the US dollar is getting “punched in the mouth” – having dropped 5.1% in the last quarter.

It’s lost 2.3% just in July so far, partly due to a revival in the euro. And there could be wore to come:

There is some more detail.

The US dollar is taking a pummelling, sending commodity prices rattling higher.

The dollar has sunk to its lowest level since early March, when the coronavirus crisis was sweeping global markets. The selloff has driven the euro to its highest level in 18 months, at $1.1547 this morning.

Sterling has also benefited, hitting $1.276 last night for the first time in six weeks.

Here we do have a bit of a problem as whilst the US Dollar is lower it is not really weak. Of course it is against Gold by definition but it was not long ago we were considering it to be strong and it certainly was earlier this year especially against the emerging market currencies. At the beginning of 2018 US Dollar index futures fell to 89 as opposed to the 95.4 of this morning but the Gold price was US $1340. So whilst monthly charts are a broad brush our man or woman from Mars might conclude that a higher Dollar has led to a higher Gold price.

If we stay with currencies those from my country the UK have done much better out of Gold. Looking at a Sterling or UK Pound £ price we see £1465 this morning compared to a previous peak of less than US $1200 and before this surge a price of around US $1000. Another perspective is provided by India a nation with many Gold fans and those fans should they have owned Gold will according to GoldPrice.org have made 996% over the past 20 years.

Negative Interest-Rates

Whilst there has been a general trend towards this super massive black hole there are particular features. For example a nation renowned for being Gold investors cut its official interest-rate to -0.75% in January 2015 and it is still there. That is Switzerland and the Swissy has remained strong overall, so the weak currency argument fades here. We have a small pack of “Carry Trade” nations who end up with strong currencies and negative interest-rates including Japan and more recently the Euro.

The generic situation is that we have seen substantial interest-rate cuts. The UK cut from 0.75% to 0.1% for example reducing the price of holding Gold. But I think that there is more than that. You see official interest-rates are increasingly irrelevant these days as we note cutting them has not worked and the way that people have adapted for example the increased number of fixed-rate mortgages. If we look a my indicator for that I note that we have seen a new record low of -0.11% for the UK five-year bond yield this morning. So now all of the countries I have noted have negative interest-rates or if you prefer the 0% provided by Gold is a gain and not a loss.

As I pointed out in my article of July 10th the US does not have negative bond yields but is exhibiting so familiar trends. The five-year yield has nudged a little nearer at 0.26% this morning. That contrasts sharply with the (just under) 3% of October 2018. So a 2.7% per annum push since then in Gold’s favour.

Inflation

The arrival of the pandemic was accompanied by a wave of experts predicting zero and negative inflation. As I pointed out back then I hope I have taught you all what that means and this highlighted by @chigrl earlier links in with the Gold theme.

India can expect inflation to surge to more than double the central bank’s target and the currency could lose a quarter of its value if the Reserve Bank of India begins printing money to fund the government’s spending…….Rabobank estimates that inflation could surge to an average of 12% in 2021 if the RBI was to finance a second stimulus package of $270 billion, a similar amount to what was announced in the first spending plan earlier this year. The rupee could plunge 16% against the dollar from 2020 levels and almost 25% from 2019 under that scenario.

They are essentially making a case for Indians being long Gold although they have not put it like that.

In the UK last night saw the latest in an increasingly desperate series of attempts by the UK Office for National Statistics to justify its attempt to reduce the UK RPI by around 1% per annum. That would affect around 10 million pensioners according to the actuary who spoke. Indeed the economics editor of the Financial Times Chris Giles was reduced to quoting a couple of anonymous replies to one of his own articles as evidence.How weak is that? Still I guess that when you are impersonating King Canute any piece of wood looks like a branch.

But inflation is on the horizon which of course is why the UK keeps looking for measures which produce lower numbers.

Comment

As you can see there are factors in play supporting the Gold price. The only issue is when they feed in because having established an annual gain of 2.7% from lower US bond yields only an Ivory Tower would expect that to apply each year. In fact I think I can hear one typing that right now. In reality once we come down to altitudes with more oxygen we know that such a thing creates a more favourable environment but exactly when it applies is much less predictable. I have used negative interest-rates rather than the “money printing” of The Guardian because it is a more direct influence.

I have posted my views on the problems of using Gold ( the fixed supply is both a strenght and a weakness) before as a monetary anchor. It was also covered in my opinion by Arthur C. Clarke in 2061. So let move onto something that used to be used as the money supply and some famous British seafarers made their name by stealing.

Silver rallied Tuesday to finish at its highest level since 2014, up by more than 80% from the year’s low, benefiting as both a precious and industrial metal as it looks to catch up with gold’s impressive year-to-date performance…..In Tuesday trading, September silver contract SIU20, 3.26% rose $1.37, or 6.8%, to settle at $21.557 an ounce on Comex. Prices based on the most-active contracts marked their highest settlement since March 2014, according to Dow Jones Market Data. They trade 83% above the year-to-date low of $11.772 seen on March 18, which was the lowest since January 2009. ( MarketWatch)

So I will leave you with those who famously advised us that we may not get what we want but we may get what we need.

Oh babe, you got my soul
You got the silver you got the gold
If that’s your love, it just made me blind

19 thoughts on “What is the case for Gold?

  1. Gold

    I remember the Gold price hitting an all time high of about $728 around late January 1980 then fell in the subsequent year and never reached that peak for another 30 years !

    The Gold price peaked again in July 2011 at circa $1,843

    Taking into account inflation in the last 40 years Gold has proved to be a poor investment over that period and property prices exceeded Gold by a wide margin.

    I can understand the Gold price now spiking as assets are overvalued now in a world downturn with massive debts and wouldn’t like to call as to whether or not it will go much higher, it all depends how quickly world will be able to bounce back pre coronavirus damage.

    Negative interest rates

    I have always thought that in the UK interest rates would have to go negative. Not that I believe that this is the right thing to do but they may have to be tried to fairly distribute wealth.

    I appreciate negative rates haven’t worked thus far but the negative rates not exceeded anywhere in the world at a meaningful reduction of 1-2-3 %

    • Hi Peter

      I think that if they took interest-rates as low as you suggest the banking system would collapse as people took their money out of it. We would then see the authorities step in to help “The Precious” and things could go very wrong,

  2. Perhaps Peter, you could explain to us how taking money off people that have worked hard for it and saved it and giving it to those who haven’t got any is somehow:
    1.Moral.
    2.Justified.
    3.A solution to the inequality caused by the asset bubbles created by central bankers that has massively enriched the 0.1% by dropping rates to zero, would by making rates negative, further fuel asset bubbles making those billionaires even richer and markets more unstable, and your solution would at the same time steal income AND capital from most people, who have despite all the policies of central banks, managed to save something.

    Please do enlighten us.

    • Kevin

      Not all people with plenty of cash have worked hard for it.

      Philip Green is one such example buying a company paying himself a billion or so in a dividend, which in turn stripped the assets of a company !

      Then there are the likes of private equity and funds who buy companies strip the assets and they go bust and funds who short shares which they did in the banking crisis and forced Halifax to go bust.

      Short sellers tactics questionable as once a share price has collapsed its impossible to raise money and protect all investors.

      There is no system in the world which will protect everyone and the people with the biggest shoulders should take a fair proportion of losses, the poor who have lost their jobs or cannot work through disability protected.

      The days of Cadbury and other institutions have long gone where the philanthropists used to provide homes for the workers and build churches and libraries, instead they buy multi million pound yachts and such and its questionable how many of the rich oligarchs have gained their wealth.

      • “Not all people with plenty of cash have worked hard for it.”
        Brilliant logic there Peter, so how many oligarchs, billionaire businessmen,Philip Greens,Hedge Fund jackals and general shady financial crooks who play the system are there in total?, lets just add that number up and then add up all the people sandwiched between those animals and those people you think deserve our money, I would wager that is a very large number of people, so punishing hundreds of millions of ordinary working people to get at those few at the top would make sense to you rather than targeting the very people and the system that has financially raped our economies, I also remember you advocated keeping the housing bubble going recently for equally obscure and perverted reasons, have you ever thought of going into politics?, I think you are just the type of person they are looking for.

        • Kevin

          “so how many oligarchs, billionaire businessmen,Philip Greens,Hedge Fund jackals and general shady financial crooks who play the system are there in total?, ”
          I don’t know but there has never been a time where the richer have accumulated so much wealth since the war and more and more of the poor or even nurses and people in work having to go to food banks !

          Its not about numbers its more about fair proportion of wealth.

  3. Hi Sean
    I think I’d go with a song from 50 years ago…
    Nothing hes got he really needs
    21st century schizoid man

  4. If you compare the gold price to asset prices, is there such a spike???
    Perhaps it is only the weakening value of fiat money against these assets that we are seeing.
    What could possibly be causing that?

    • Short term yes long term no. Gold has been a poor investment over the last 40 years.

      However it could go higher because other assets have ballooned over the last 40 years, there lies the dilemma !

  5. Hello Shaun,

    re: ” Financial Times Chris Giles was reduced to quoting a couple of anonymous replies to one of his own articles as evidence”

    ah yes , R. Regan and M Mouse no doubt……

    I’m not so sure of going back to a gold standard as I beleive it was also fiddled anyway .

    I’m sure the BoE would if they could find out where they put their philosopher’s stone…….
    ( well actually they have in the form of virtual money made with a key stroke….)

    Forbin

    • Hi Forbin

      I was a little surprised to hear Chris Giles talking about comments to his FT articles because I had seen ones where they were not allowed. He seems to have allowed them again just in time…

      As to the Gold Standard I a not so sure either. Also the book 2061 puts me off via the discovery of a diamond mountain on Europa.

  6. Is that real bars of gold or the lead ones China is allegedly painting up?

    It is really a question of where all this printed cash is going, other than the Italian mafiosi and their Mediterranean cousins. Houses have gone as high as they can really, given that they are leveraged assets, so there is only one way mass rental defaults and falling wages can take them. Shares have recovered so like bonds, the yields are not great. As I have said before, I do not think we will see consumer price inflation, because that requires demand,which has been driven into the dirt. The reason for gold’s lacklustre (see what I did there?) performance 1980-2010 is a lack of Russian cash and alternative yielding assets.

    So, where do Boris’ Russian chums put their dirty money after laundering it in Londonmat (to quote today’s report)? Not really too many options beyond commodities and a nice profit if you get in early. Gold mining shares have done quite well recently too, so they can launder some through the stock market – not really worth the bother of learning about fines for laundering or market manipulation as no- one enforces them.

    Anyway, I will do the inevitable reference to Spandau Ballet. https://youtu.be/ntG50eXbBtc

    • Hi Dave

      The issue over whether the Gold in the vaults is Gold is a modern one. Or rather on any scale. I was not a great user of Comex futures but did from time to time and there was not the uncertainty we have now.

      As to Russian money it has caused trouble in other places such as Cyprus and more recently in Latvia.

  7. My case for gold is simple: the current policy by the BOE and UK government are destroying my savings, and I’m left with no other choice but to hold gold.

    I think that is the real reason the price of gold is going up, people are losing confidence in the current system we have.

  8. Pingback: DIY Investor - The Do-It-Yourself Investing Blog

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