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