Our in-house mining advisor and big gold enthusiast Malcolm Burne, who is also Founder Chairman of the Golden Prospect Precious Metals Fund shares his view on the current gold market! I think this will be an informative read for our subscribers who enjoy alternative investments. If you would like to get more information we are always happy to have a chat.
Gold is currently giving its followers one of its notorious roller-coaster rides with its continued volatility reflective of the huge number of issues that are buffeting the world’s economic and geopolitical climate. It is widely recognised and acknowledged that we are at a critical point in global affairs and there are plenty of reasons for both large scale financial cynicism and scepticism. There are so many “maybe’s”, “would be’s” and “could be’s”, it is hard to escape the increasingly deafening noise.
So, let’s look at many of the situations and possible events that could trigger the next major swings in the price of precious metals and attempt to navigate our way through. For ease of comprehension we will break down the scenario into three major areas.
Finance and Economics
- The FED has announced it is unwinding its $4 trillion QE (Quantitative Easing) programme which will force up interest rates, prop up the dollar, which as we know gold reacts to negatively.
- The US debt ceiling that Congress has to approve or not is approaching $20 trillion and any uncertainty about extending this beyond the already revised December date this year will have a substantial impact in terms of market volatility.
- Trump is proposing to reduce corporation tax from 35% to 20% which has been holding up equities at the higher levels. Further, middle class tax cuts could, it is argued, provide substantial stimulus for the economy which could lead to further monetary breaks.
- Trump is also proposing a tax repatriation of the estimated $4 trillion from the Tech and Social Media giants who have been hoarding their funds in offshore jurisdictions, namely the likes of Apple, Google (Alphabet), Amazon, Microsoft, Cisco etc. Capital inflows from this should have a dramatic impact on the $US, Wall Street and the Global financial system. A survey of 300 firms found that most have few plans to invest these repatriated funds in the real economy, however. It is believed that they are more likely to pay down debt, instigate share repurchase programmes or engage in M & A activity. It is feared that this repatriation will drain dollar liquidity from offshore markets at a time when the FED has declared it will begin quantitative tightening.
- Interest rates must eventually rise, pushing bonds down which traditionally leads to a big sell off in equities. Inflation, however, is still being held back by lacklustre wage growth.
- There is a lot of comment and punditry about an attack on the dollar and the death of money. China has allegedly sold $100bn of securities in the past year and is buying/stock piling high purity gold bullion bars. In fact, many Countries are collectively hedging an estimated $1.4 trillion and it has been noted that Germany has at last received its gold bullion back from the US which it requested 3 years ago.
- Many economists like to argue that all FIAT currencies inevitably or eventually go to zero. Over the last few hundred years a substantial number of FIAT currencies have become worthless with over one quarter of those due to hyperinflation.
- The message from history seems to be that no FIAT currency has lasted forever and that in today’s world they are all made of paper and backed by nothing. Worse still total debt derivatives, according to estimates, have reached circa $1.2 quadrillion (Source unknown). However, the same economists are the same who believe that a debt-default tsunami could devastate wealth over-night. Russia, as well as China, has been taking steps over ten years to prepare for this possible eventuality by boosting its gold reserves. Even the Eurozone, the 19 euro-using nations collectively have just over 10,000 metric tonnes of gold with most of their central banks still in the accumulation mode.
- Commentators for some time have been writing about China, Russia and Iran coordinating a new monetary order that does not involve US dollars. China would buy oil from Russia and Iran in exchange for the Yuan, or so the argument runs and apparently the BRIC’s leaders have indicated their support for oil to be priced in Yuan and then convertible into gold.
- Russia has actively been promoting the Ruble as a regional hard/reserve currency. It has also been expanding its digital economy and exploring the use of Blockchain technology and cryptocurrencies as a medium of exchange.
All of the above seem eminently feasible and not just rhetoric as there has been too much complacency over the soaring debt to GDP ratios in recent years. It is feared that US consumers are now being subject to a record $13 trillion in household debt, raising the national debt well passed $20 trillion which would have been unimaginable just 10 years ago.
- Geopolitically there is no shortage of potential conflicts in the world today. North Korea’s pursuit of nuclear armed weapons masks the other emerging conflicts which include a possible coalition of Arab states, including Saudi Arabia and Egypt, promoting a fight with Iran.
- The South China Sea is another flashpoint where a violent confrontation between the US and China could happen in the near future.
- Venezuela is another country that is declining into political chaos and social disorder.
The months ahead will no doubt see a rise in tension in many areas of the world and it is not surprising that gold is promoted as a quasi insurance policy in terms of being the obvious safe haven asset.
The gold price has been under undue influence of the unconventional monetary policy and growth of cyrptocurrencies as an alternative safe harbour. This could explain gold’s relatively poor responsiveness to the recent political tensions and has appeared weaker than expected.
There is an increasing level of chatter about a dollar reset or reboot and the return of the gold standard leading to a quantum leap in bullion and other precious metals.
The current market dynamics in play for gold are more challenging for investors than I can ever recall. The short term view is that gold will stay under pressure as interest rates rise and until the dollar loses its strong grip of late, the gold price will be constrained despite all the ‘black swans’ circulating the globe.
However, as gold pitches and tosses in these turbulent waters it still remains, in our view, the only real place to park money and it has shown plenty of signs that it is ready to take off and accelerate should even more fear increasingly grip the worlds stage. According to some major investment banks, in the last gold bull market their clients had roughly a 7% allocation to the gold sector whereas now their client’s gold ownership is only at about 1%. We have been waiting for the Dow/gold ratio to substantially change and I believe we are very near to a major reversal.
It is interesting that the market research team at Deutsche Bank very recently published an assets survey that devoted almost all of it to “The Next Financial Crisis”. They predicted that a crisis is coming and that it is imperative to prepare for it.
Summarising, the financial system is more precariously poised today than I can recall in my last 50 years of financial and investment commentating with few options for an orderly outcome other than hyperinflation with gold the only real protection against it!