New high for gold - but why?

The Dollar price of gold has hit a new all-time high of more than $2,157/ounce, which is a gain of more than 17% over the last 12 months. But given that various background relevant factors - interest rates, geo-politics - haven't noticeably changed, what can be the explanation for this welcome rally. The old explanation - more buyers than sellers - just begs the question: why are there more buyers than sellers?

Some have started to call this a 'stealth rally' but beyond this they are as much in the dark as the rest of us. It might seem limp, but for me the rally seems prompted by an inchoate darkening of the world on many fronts, with little obvious reason for optimism. In the West we lack political leaders who are competent to handle what ought to be a prime task - safeguarding the value of our fiat money.

In the US 'Super Tuesday' has confirmed that November's Presidential battle will be a fight of the geriatrics - for the Republicans Donald Trump, who will be 78 in November, will be in the red corner. In the blue will be Joe Biden, who will be 82 shortly after the election. Neither can be said to be a candidate who will unify the country. In a January Gallup poll Biden was viewed favorably by 41% of US adults, down from 49% in October 2020. Trump found a 42% favorable rating, also down from 45% in 2020. Pew Research in January found that just 33% approve of Biden's job performance. The Dollar today only buys about 88% of what it could buy in 2021, when Biden came into office. Biden this week is expected to announce major tax hikes, aimed at the ultra-rich, but they will be seen by many as confirming he is a socialist, a dirty word for many Americans..

The UK is no better. This week the Chancellor (finance minister) presented what is expected to be the final Budget of the Conservative government (which has been in power for 14 years) before the UK must stage a general election by the end of this year. The Budget disappointed just about everybody and, despite the unpopularity of the main opposition party, Labour, is expected to win the election even though its favorability rating according to a YouGov survey in February was minus 12 (and that of its leader, Keir Starmer, was minus 25). Food prices are 25% higher than two years ago and rents 10% higher. The total tax take will soon be the highest in eight decades. Today's Pound buys only 62% of what it did in 2010, when the Conservatives took office. People face their biggest fall in spending power in 70 years and living standards won't recover their pre-pandemic levels until 2027.

Uncertain outlook

Of course we can point to both individual and official sector buyers of gold - China's central bank gold holdings rose by around 390,000 troy ounces in February, the 16th consecutive month of additions - but simply to note the buying surge begs the question - why? Part of the answer must be that investors are positioning themselves ahead of the expected cuts in US interest rates. Jerome Powell, chairman of the US Federal Reserve, said this week that US interest rates will be reduced later this year, although he made his usual cautionary noises about inflation needing to clearly and lastingly return to the 2%/year target. It's almost as if investors have tired of sitting on the sidelines and concluded that interest rates are heading down sooner or later, so better to buy at (what they hope) will prove a lower price.

But it's the background context of important elections later this year - of a possible Trump presidency heralding a careless approach to tight monetary policy, and in the UK the near-certainty of a new Labour government many believe will be indifferent to arcane fiscal matters such as a rise in debt/gross domestic product ratio - that spells the kind of monetary uncertainty that is encouraging for gold.