Gold: Signs of a Renewed Upsurge taken from our ‘On Target Newsletter’ issue no 267

OT 267 22 May 2021

This year is the 50^th anniversary of America’s decision to scrap the dollar’s link to gold. Until then, foreign governments could exchange American paper for federal government owned metal freely and without limit. Which increasingly they did, building a crisis that forced the US to abandon the dollar’s backing.

Coincidentally, although not surprisingly, the currency has since lost 50 times its value since then. It now requires 50 times as many dollars to buy one ounce of the yellow metal.

It’s looking increasingly probable that this anniversary year we’ll see a renewed major upsurge in the gold price.

There are encouraging signals.

The Chinese government has just given banks permission to import about 150 tonnes during April/May. There’s been a surge in industrial and retail demand for gold in China. There could also be more central bank accumulation, but we don’t know. Some analysts say China is building huge reserves as part of a long-term plan to make its renminbi currency convertible into gold, which would destroy the greenback’s global primacy if/when it happens.

Other countries’ central banks, after a pause in buying activity brought about by the pandemic, have resumed interest. Hungary has tripled its gold reserves in one of the biggest purchases by a central bank in decades. Poland says it wants to buy another 100 tonnes.

Poland is one of several countries, including Germany and Australia, that have moved gold they own from the UK, the US and France to their own central bank vaults. They don’t have complete trust that other governments won’t freeze their assets in time of war or political disputes.

India’s demand for bullion has rebounded from a pandemic-induced slump, with record-breaking imports in March of 160 tonnes. India and China are the world’s largest consumers of gold.

Technical analysts now seem to be increasingly optimistic about the outlook for the gold price. Charts suggest prices bottomed in March, completing the corrective

down-phase from August, when its rise looked overextended. The current recovery seems to be signalling a positive outlook of medium-term significance.

The biggest theme for investors since the global financial crisis 13 years ago has been the dominance of liquidity – abundant credit and minimal interest rates – as the fuel to inflate asset prices. For many years easy-money policies were expected to bring an explosion in inflation, That didn’t happen. But the sheer scope of money-creation now suggests that this time it will.

Later this year an exuberant world economic recovery and spending of trillions of stimulus dollars could bring an explosion in anticipations of inflation, which VanEcke Investments say could “spiral out of control.”

Other catalysts favourable for gold could emerge such as a weakening American economy, debt problems, US dollar weakness and/or “black swan” events caused by radical fiscal and monetary policies.

Inflation isn’t always good for gold. What matters is whether interest rates are raised enough, or not, to match inflation.

Eoin Treacy says gold thrives in an environment of negative real interest rates. There is no way central banks are going to allow positive real interest rates to re-emerge. They need to erode the massive quantities of debt taken on to fund pandemic remediation measures. Financial repression is the only way to do that – prevailing interest rates will be kept below inflation rates for years to come.

Great for values of many investment assets, but particularly for gold.

OT 30 May 2021