In response to the tragic events leading up to civil unrest in the US last week, the US dollar gold price rose by 0.9% on Monday 1 June to above $1,741 a troy ounce. For Michael McCarthy, chief strategist at CMC Markets, one reason was clear: “concerns about the unrest in the United States at the moment appear to be weighing on market sentiment,” Reuters quotes him as saying.
Uncertainty coupled with fear underpins a higher gold price. The reverse is true too. When the world feels more at ease with itself, gold’s price drops.
Yet the relationship between fear and the gold price is, like all quasi-emotional links, indirect.
It’s difficult to recall now how shattering was the news of the terrorist attacks on the Twin Towers in New York on 9 September 2001.
One metals’ analyst described the situation that day as “complete pandemonium”.
Yet the gold price responded fairly calmly, going up (as measured by what was then the world benchmark, the twice-daily London fix), by almost 6%, from $271.40 in the morning to $287 in the afternoon.
Gold analysts are as prone to hysteria as the rest of us. The ‘pandemonium’ of that day did not register that much.
A jolting spasm in world affairs is not enough in itself to drive the gold price higher. Context is everything.
Back in 2001 the world was emerging from a lengthy period in which massive gold sales by the world’s biggest gold holders – central banks, closely tied as they are to governments – had been net sellers of gold. Switzerland had led the way by selling 1,550 tonnes of its gold reserves (more than half the total) from 2000.
The relatively weak gold price during the 1980s and 1990s encouraged gold mining companies to sell forward, to lease, their gold to bullion banks. Gold that was not yet dug out of the ground was sold forward to banks in a process known as hedging. These banks then lent the gold to whoever they liked, for a small interest payment. During the long bear market, when gold experienced a prolonged price deadline, that felt like a win-win situation – the gold miners, who expected the future price of gold to be weaker, made more money than they hoped, and the banks made a bit of interest on the lent gold. But this created a paradox of perpetuating the low price.
The gold price has recovered significantly since 2001 and hedging by gold miners has largely dried up. Thanks to the low-to-zero global interest rate environment we are living in, banks do not make money from gold leasing. Also, gold miners have stopped their hedging because the price of gold has been going up. Why sell ounces that are still in the ground at today’s prices, when tomorrow’s price may well be higher?
Many other factors underpin the gold price. Are central banks (the US holds more than 8,000 tonnes) buying or selling gold? Since 2010 they have turned from net sellers to net buyers.
In India, with some 10 million weddings annually, gold is sought after as part of the country’s traditional dowry practice. India typically buys (and stores) a lot of gold, held against a rainy day.
Demand for physical gold has slumped in the past few weeks, hit in part by the high prices and partly in India because the government more than doubled (to 3%) the tax on gold. India’s gold imports in May this year collapsed by 99% (compared to the same month in 2019) because the country has been in ‘lockdown’. The US dollar price of gold in May we should note started the month around $1,700 per troy ounce, slipped a little by 7 May, peaked at $1,764.01 per troy ounce on 18 May, fell again to around $1,700 by 27 May and is now back at above $1,743. This is an astonishingly strong performance during a month when the world’s biggest gold consumer halted its buying.
As any chart of the long-term gold price shows, gold has been since 2002 in a strong bull market, with the price steadily rising. Will it continue to rise? There cannot be any certainty. All that can be said is that the world, which has introduced unprecedented economic stimulus packages worth trillions of dollars – all borrowed money – is experiencing enormous political and monetary uncertainty.
If one is looking for a reason to get a Glint card and put some gold on it, there can be no stronger justification than the example of what’s going on right now – while India stopped its gold buying, the gold price stayed close to its all-time peak in US dollars.
When I had the idea for Glint during the global financial crisis of 2008, it seemed obvious to me that the world deserved a reliable form of money. We all needed a form of money that insulated you from the destructive effects of inflation and from potential breakdowns in the highly leveraged financial system. To me, then and now, the answer was – incorruptible gold.
The everyday man and woman on the street easily understood the idea. My mother would often say: “Son, money doesn’t buy you what it used to.” London cabbies would tell me that “gold, always holds its value”. Experienced high net worth individuals, those who had worked hard through cycles of booms and busts over the last 50 years, they also got it.
But many of the younger analysts and fund managers, those who control the wallets of the big venture capital companies, didn’t get it. They had never experienced double-digit interest rates or difficult recessions.
The 2008 crisis was not allowed to play out. Instead of toppling over the economy was propped up by huge amounts of central bank stimulus. That led to the biggest period of growth seen in over 100 years. No bad thing one might think. Except, what was that growth built on, apart from illusions and credit?
The existing monetary system benefitted some people hugely, even during that 2008 crisis. Easy for them to get a multi-million mortgage; money poured into the funds they managed, fat bonuses returned.
I remember saying to one investment committee that just because house prices were going up in London, it didn’t mean that they always would, and explaining that a house in Japan worth 16 million in 1990 was now, twenty years later, worth 5.5m. The head of the committee looked alarmed and said: “Don’t say that, I’ve just bought a house”. It was probably a very nice and expensive house that was paid for with money lent at very low interest, nearly free, of course only available to those who has a big enough deposit. They were clearly quite short sighted… they didn’t invest in Glint.
Glint continued to find funding from contrarian investors, including many individuals who have worked hard all their lives to build up their wealth. People who have experienced the cycles of boom and bust and who worry about where the global economy and central bank policy is heading.
Covid-19 slammed us into this economic crisis, one that many had expected, but which has turned out to be far worse than anyone imagined. Most people in the investment community that I speak to are now extremely worried about the economy and global debasement of foreign currencies, thanks to the vast government borrowings that have been built up in the space of a few weeks. Suddenly it seems, I am not the daft contrarian, but we at Glint may argue, the visionary.
As a young man I didn’t think about death. Like so many young people I thought I was invincible. Even when I became a young father in my 20’s I never thought about what would happen after I passed away. It wasn’t just because I had no time to think of such things among the nappies, the bottles and running my eCommerce agency. Mortality was for others. Or so I thought.
And then I found
From its birth in the heart of a supernova, I learnt that Gold’s nature is constant, never changing. It’s one of the reasons we use it as money, as an incorruptible and honest ledger of what we owe to each other, always retaining that value.
But it was gold’s ability to defy time, age and life…for it to be witness to macro-economic cycles, black swan events and span generations. All those supra-human things about gold made me think about the bigger picture. It very sharply brought home to me the meaning of legacy.
The only thing we can be certain of in the long term is the breakdown of order. Entropy is forever. As if to test us, the good times will never last: a personal or public crisis is always just around the corner. But just far enough out of reach to lull a new generation into a false sense of security and foster unsustainable excess.
So, I look into the eyes of my sons and wonder – what can I do to help them through the inevitable challenges they will face after I am gone? Any ‘words of wisdom’ I may have to offer might sink in, something about how I conduct myself might have a long lasting positive and useful influence on them; but money always helps.
If I manage to save some by the time I die then I won’t put it at risk through an investment in some flaky get-rich-quick scheme but in the only tangible constant they can rely on: gold, money that stands the test of time.
Reading the comments tacked on to Financial Times’ stories is often more interesting than the stories themselves. ‘Investor Maximus’ pithily added to an FT story on 2 October this year, headlined ‘Why Buffet is wrong to dismiss the benefits of gold’, that “Gold is the asset to hold when every currency is equally crap”. Which hit the nail on the head. When all else seems to be going to hell in a hand cart, then gold remains a friend, perhaps the only friend.
If you do a thorough search of the Financial Times you can find many more stories predicting the end of gold as an investment and store of value, than stories that actually look at some concrete data supportive of gold, such as this one from 2017, which identified that the gold standard – the tying of a fiat currency to some value of gold – “produced fewer catastrophes for Britain”. That latter story concluded: “None of this is to say that the gold standard is necessarily better — stability can be overrated and growth is worth having — but the data suggest the standard arguments against gold, and the standard arguments in favour of the flexible and “counter-cyclical” state we have today, need serious revision.”
The FT, which after all is a news paper, can never make up its mind whether gold is a good thing or a bad thing. Its views on gold, and much else besides, ebb and flow, a tidal depiction of the world as it currently is. It is therefore a bad guide to where the world is headed.
But at least FT journalists do a lot of reading, and make their livings (and reputations) by bringing good ideas to wider notice. One cannot hope to read everything – and the FT is perhaps most useful for pointing readers into wider, and sometimes deeper, knowledge.
Thus a recent piece about gold in the paper – ‘Gold is looking more attractive’ – caught my eye, largely because it was so unusual. Largely based on a speech by Ray Dalio, it correctly identified today’s truly massive public and private indebtedness; the vast quantitative easing (i.e. money-printing) that governments continue to indulge; the end to ‘austerity’ now signalled by all the major political parties contending for votes on the 12 December general election in the UK; the financially engineered (artificially created, that is) ‘growth’ that has been the achievement of governments everywhere from Brussels to Beijing since 2009…All of these mean, says Dalio, that “the world is leveraged long, holding assets that have low real and nominal expected returns that are also providing historically low returns relative to cash returns (because of the enormous amount of money that has been pumped into the hands of investors by central banks and because of other economic forces that are making companies flush with cash)” and that the investments “that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold…I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”
The FT being the FT it cannot avoid ending the article with a dismissive reference. “No wonder gold bugs abound” says the journalist. The gold “bug” is the way the FT always dismisses those who hold gold as quasi-bonkers, as if rational thought and gold are incompatible. And no-one is suggesting that all of one’s assets should be put into gold; it is, after all, largely a defensive asset, although one that, thanks to Glint, can now be used as real money.
Yet it must also be asked – who should we trust more? Ray Dalio, the 70 year-old American billionaire (the world’s 58th wealthiest person as of June this year) and co-chairman of Bridgwater Associates, or a rather poorer journalist’s throw-away line in the FT? It’s a rhetorical question, of course.
It’s been a stellar year for gold so far, and the way things are shaping up 2019 is but a precursor to the major event ahead. In any terms, whether the US dollar, the pound Sterling, or the Chinese Renminbi, gold has significantly risen. There has been a change in sentiment towards gold, driven by fundamentals in the market that are not going away easily or soon. As a result, you are seeing gold do what it is supposed to do in situations that we are seeing unfold around the world. The real tilt in gold’s story is that there has been a shift in its narrative. For years it has been ignored by the investment community, as many were put off by its non-yield paying tendencies, but now we have an explosion in negative yielding debt. With negative yields set to be here for some time, we believe the story of gold has moved into a positive regime. As well as that inflation in the US looks as though it is starting to get a grip, as the chart shows.
Along with a significant shift in the backdrop surrounding gold, we are now in a good seasonal spot. Seasonality plays a major role the gold market, which is now entering a positive period. Demand for gold should ramp up with Diwali (in India) kicking off the festive period in November. During this period, gold is given as a gift and therefore there tends to be a significant jump in demand. Following on from Diwali, we will quickly move into Christmas and then the Chinese New Year. As India and China continue to expand and wealth grows within both countries, demand for gold is set to become more pronounced, especially given that people within these nations will be aware of how depressed the long-term price of gold really is. With a natural increase in demand for gold, prices will be pushed higher over the coming months.
In the past six months the Sterling price of gold has gained more than 21%, a remarkable rally. Yet in the past week it has lost more than 4%, although a little less in US Dollar terms, almost 3%. For the novice investor this rollercoaster might be alarming but for the long-term saver in gold all the comforting signs are still there – and even the bigger banks, usually somewhat hostile to gold, are starting to take note. Citigroup put out a note this week citing macroeconomic reasons why it believes that the US Dollar gold price could surpass the previous record price of $1,900/oz and reach $2,000/oz within the next two years.
Despite the short-term outlook for gold remaining weak, any move lower will be limited. Last week, the yellow metal had its biggest daily loss in more than three years after an optimistic tone from Jerome Powell, chairman of the US Federal Reserve Jerome Powell, who suggested that the US economy was performing well. Regardless of this the core market themes and worries are still intact and therefore allocating to gold during these next two weeks could offer a good entry point. The near-term weakness might have come at the right time. Trade tensions, weakening macroeconomic conditions and increased stock market volatility will continue to support the gold price. Gold is getting a tailwind from plunging bond yields, currency wars and elevated debt levels across the world. We would expect to see a substantial period of US dollar weakening, similar to that seen in the 2008 the financial crisis. Whichever way you look the relationship between the US dollar and gold is changing (and at times confused), which could lead to a sustained upward move in Gold. Currently, we are in a period where we will see some short-term consolidation but this is healthy and required for gold to make its next leg higher.
What would you sooner have: £100 today or £115 next month? There’s no obvious answer. It all depends on your present and expected needs. If you lend something, you expect that something back, plus a little extra. So someone who lends his gold expects to receive it back, plus an extra amount – the interest. But what happens when we live through an era of very low-to-negative interest rates, like today? Lending anything becomes much less attractive; the best you can hope for is that you get your original loan back. Not much incentive there.
Gold has always a medium of exchange. It’s widely held by central banks and other institutions as a store of wealth. In the 1980s, gold was used as collateral for a carry trade, which worked like this. A central bank loaned a bank some gold, at a very low rate of interest. The bullion bank then sold the gold and invested in securities with a higher rate of return, such as government long-term bonds. The bullion bank effectively sold the gold short.
Now suppose the loan was called in by the central bank. If gold has risen in value, the bullion bank will have to go into the market and purchase higher priced gold. Indeed, if many banks are short, the unwinding of the gold carry trade could drive the gold price even higher.
The depressed price for gold and the gloomy noises about the future price of gold meant that central banks happily lent their gold; bullion banks happily borrowed it and invested in US treasury bills; and there was an explosion in the bullion business. Everyone was (more or less) happy – except for holders of physical gold, who blamed gold miners for helping to depress the gold price.
Time moves on. Today, the gold lending market has become so developed that for every ounce of physical bullion in the possession of banks there may be hundreds of paper liabilities. No one has a real idea of the true level of paper gold leverage that we have now reached. One thing is certain: a low and positive gold leasing rate has led to a substantial uncovered position. From a central bank’s perspective, if a lease is coming due then there is no incentive to renew it – would they really want to, given the unknown counterparty and systemic risks that may occur in today’s unstable economic climate?
It is clear that there is no real incentive today to lend gold. The appetite for doing so has vastly diminished. The gold price has recently moved rapidly from $1,200 to $1,550/ounce. With yields converging towards zero and even going negative, the likelihood that gold will be lent by anyone is illogical – and that ought to mean that as the supply dries up, the price can only go higher.
Is Mark Carney, the Governor of the Bank of England (BoE), a conservative or a radical? It’s doubtful that Carney is a bomb-thrower, but maybe his grey suits are hiding a desperado who yearns to overturn the apple-cart.
One the boring side of the scales are: he’s Canadian; he spent 13 years at Goldman Sachs; is a former Governor of the Bank of Canada; and his wife, Diana Fox Carney, likes to rub shoulders with the great and good. In six years as the head of the BoE he has made few waves, apart from his gloomy (and incorrect) warning that the UK’s departure from the European Union would bring disaster to the UK economy. That has yet to happen – three years after he made his guess. Who knows? It may yet turn out to be correct. On the other hand Carney knows his time at the BoE is running out – he leaves in January 2020 – and maybe he wants to go out with a bang.
Evidence for this is the speech he gave at the Jackson Hole Symposium last week. It was a remarkable speech – even a daring speech, the dull-as-ditch water title of which (The Growing Challenges for Monetary Policy in the current International Monetary and Financial System) seemed deliberately designed to throw journalists off the scent of something very meaty indeed. For Carney did nothing less than trash the US dollar as the international reserve currency. He pointed out that some $16 trillion “of global debt is now trading at negative yields”, a fact that should send a shiver up the spine of anyone, central banker or otherwise.
Carney spoke about the “international monetary and financial system” (IMFS), and said the consensus view that countries “can achieve price stability and minimise excessive output variability” through flexible inflation targeting and floating exchange rates was “increasingly untenable”. What do central bankers want? Stability of course and, if possible, growth. For Carney, the current IMFS is “not only making it harder to achieve” this stability but is also “encouraging protectionist and populist policies which are exacerbating the situation.” He told his audience that “in the new world order, a reliance on keeping one’s house in order is no longer sufficient. The neighbourhood too must change….We are all responsible for fixing the fault lines in the system.” In his view the “deficiencies of the international monetary and financial system have become increasingly potent…Even a passing acquaintance with monetary history suggests that this centre won’t hold.”
Parsing his central banker-speak, what Carney was saying is that the current international financial system is broken. The US dollar is losing its status as the world’s most sought-after reserve asset, while the Chinese currency, the renminbi, the leading candidate to replace the dollar, is not yet ready for the task. So, Carney reasoned, what the international financial system needs right now is “multiple reserve currencies.” He floated the idea of a “Synthetic Hegemonic Currency (SHC)” a kind of globally dominant public sector-managed digi-money, perhaps run by the International Monetary Fund, as an international reserve asset – although the IMF already has the SDR (Special Drawing Rights) as its unit of accounting.
Carney came up with the right diagnosis – the current international financial system is bust – but prescribed some very peculiar medicine, which was in any case undermined by his own analysis. For he mentioned the immense difficulty posed for the world by the shift away from sterling to the dollar in the early 20th century, driven by the First World War. Quite correctly he said that the “resulting world with two competing providers of reserve currencies [the UK and the US] served to destabilise the international monetary system” and “worsened the severity of the Great Depression.” If it was such an upheaval to swap one reserve currency for another, what might be the risks of letting several currencies compete for reserve status?
What to conclude from Mark Carney’s major farewell address? Several points emerge. We are living through a time when the house of cards – the world’s mammoth dollar indebtedness – could topple at any moment, or might just blithely carry on, for now. Central bankers are floundering when it comes to providing practical solutions, but then they are only human. Carney’s speech was the central banker’s equivalent of holding up a sign which says “your guess is as good as mine”.
Gold has risen significantly in the past few months but this is only the start as the USA’s Federal Reserve is on shaky grounds. The fundamentals behind the recent move remain in place and, while the price may be edging lower, a period of consolidation, or price correction, is needed before the next rise.
What’s fascinating about the current bull run in gold is that it’s happening partly because various central banks are converting some of their US dollar reserves into gold. Central banks bought 224.4 tonnes of gold in Q2 2019, and more than 370 tonnes over the first half of the year. New mining output has found it difficult to keep up pace with the market’s requirement.
During the past decade of Quantitative Easing the value of the dollar has been protected by global money printing, which in turn has helped to ensure that currencies around the world have not risen dramatically in value relative to the dollar. The Federal Reserve needs to continue to protect the value of the dollar so that it is able to maintain its role as the reserve currency around the globe. If it was to lose its safe haven status, then the United States would be unable to print its own currency to pay its bills. Furthermore, if the US dollar was to lose significant value relative to other global currencies, investors could move away from the dollar, making it very difficult for the Federal Reserve to accommodate America’s vastly expanding US budget deficit and continue its policy of lowering interest rates.
Total US debt has now reached around $21.03 trillion, which is greater than all the combined debt around the world. Several central banks have converted their US dollar reserves (in the form of government bonds) into gold, suggesting that demand for US government debt will not keep up with supply, which is driven by the United States’ rising budget deficit. As a result, this will force the Federal Reserve to print more dollars in order to purchase the unsold amounts of new debt that the government issues. How can they? Isn’t the Federal Reserve planning to end the United States QE programme? Money printing will have to continue in some shape or form. Printing more currency will inevitably put further pressure on the value of the dollar. In order to protect the currency, the central bank needs to make it more attractive to investors by raising rates significantly. If the US economy moves towards or goes into recession, raising interest rates would be disastrous as unemployment rises.
Gold may have already risen rapidly this year, but this is only the beginning of its rise. US debt is rising, the value of paper-money is declining and interest rates are being forced towards zero. The only currency worth holding is gold.
United States Government, ‘U.S. National Debt Clock – https://www.usdebtclock.org’, (14th August 2019).
In the last 30 days the US dollar price of an ounce of gold has gone up by more than $97 – that’s almost 7% in a month. The S&P 500 index is just about holding onto positive territory – it’s gone up by just 1.30% since the start of the year. The gold price hit $1,500/ounce on the US COMEX futures market on 7 August, taking its gain since the start of this year to a remarkable 17%.
What’s going on?
The world’s investors are getting very nervous, that’s what – and when they worry, they turn to gold. Because, unlike paper currencies, gold doesn’t let you down.
This week started with the Chinese authorities responding to the USA trade war by weakening the Renminbi by more than 1%; the Korean Won then fell by almost 1%; the Malaysian Ringgit, Indonesian Rupiah, and Australian dollar all dropped too, like tumbling dominoes.
And today (7 August) New Zealand and India followed Thailand and cut their interest rates, as Asia reacted to the slide in the Chinese currency.
When interest rates are cut, paper currencies lose value and the gold price goes higher.
How high might gold go? That really isn’t the point, unless all you are concerned about is making a quick buck.
You keep gold because in any situation of global turmoil – such as we are living through now, wherever you look – gold keeps its value.
Get your Glint Mastercard today and start using gold – the only real money.