Fresh Thinking About Gold (October 7, 2008)
Here’s a summary of what we’ve been saying in the past week about gold and the world macroeconomic picture:
- The idea that the U.S. dollar is suddenly stronger in recent weeks is a foolish notion. Rather, gold is telling us that currencies, across the board, are weaker — only the dollar a little less so than the euro, the UK pound, and other key currencies around the world. In fact, as finance ministers and monetary authorities in the euro-zone continue to fiddle, longer-term economic and political cohesion becomes increasingly questionable. In my view, the euro is just beginning a long and protracted fall — but this should not be mistaken as an indicator of a strong and healthy U.S. dollar.
- Gold is continuing to “de-link” from the rising dollar and falling price of oil as fear drives investors to the safe haven of gold. This is testimony to gold’s unique qualities as a monetary asset like none other, an asset that is not another’s liability and dependent upon the financial strength of the issuer.
- Gold is now up about $100 or nearly 15 percent from its early September low around US$773. What other asset class comes close? Subject to the panic attacks and unstable psychology of world financial markets, gold will continue its roller-coaster ride, exhibiting short-term price volatility, both up and down.
- The withdrawal of central banks from the gold-lending market is contributing to gold’s high volatility. With many banks and financial institutions at great risk, central bankers are willing to sacrifice the small return they earn on lending gold in favor safe keeping their reserves at home.
- With the dollar looking tarnished and the euro’s glory days past, some central bankers – at least those from countries with current account surpluses and accumulating dollar reserves – may be taking a new look at gold. Many gold market analysts now believe that official sales will diminish – but I think sovereign wealth funds may be stealth buyers on behalf of their governments wishing to diversify, if only a little, out of the U.S. dollar.
- The downside risks to gold seem mitigated by the strength of physical demand — for investment-grade jewelry and small bars — in the important gold markets of the Middle East, India, China, and other parts of Asia.
- Recent polls indicate that six out of ten Americans expect the economy is headed into a depression. Oil and industrial commodity markets are also confirming these same dire expectations. What’s more, the pessimists may be right if only because people in this country will finally stop living beyond their means and tighten their financial belts at home, at small businesses, and at large corporations. But a deeper recession — or worse yet, a depression — means that policy makers here and abroad will need even more aggressive monetary ease and fiscal spending to breathe life back into the sick economy.
- The Federal Reserve’s move into the commercial paper market — announcing it would begin buying short-term debt issued by companies — however necessary to stem the downward spiral in business activity — means that Washington and the American tax payer will be deeper in the hole . . . and the only way out in the long run will be to inflate the greenback.
- I’m bullish on gold because, in the end, as the global economic recession deepens, governments will find the only way out of this mess — the only way to pay for all the private debt it is accumulating — is to print more money. In other words, to inflate.
- It’s no longer just “gold bugs” buying the yellow metal but regular investors and savers — from billionaires to the middle class — rushing for the safety and protection traditionally offered by gold. These are not traders looking for quick gains — though surely there are some of these too behind gold’s big moves — but scared people seeking to protect their wealth and driven by fear that their savings are at risk. This is why the demand for gold bullion coins — the U.S. Eagle and Buffalo, the Canadian Maple Leaf, the Austrian Philharmonic, and the South African Krugerrand — is at levels not seen in three decades and why bar fabricators serving Middle Eastern and Indian markets are reporting increasingly long delivery times and rising premiums.
