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General Market Commentary
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Precious Metals
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General Market Commentary
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General Precious Metals
The gold party has only just begun
The year 2019 has been good for gold. In many currencies gold recorded all-time highs (i.e. euro, Canadian dollar and Australian dollar), with the exception of the U.S. dollar. As things stand, 2020 will become a good year for gold, as well, because the factors supporting higher gold prices already present in 2019 will remain in 2020, such as negative interest rates, rising debt levels and the central banks’ renewed interest in gold. There is also rising inflation and a slowdown in economic growth — if not a recession.
Factors that support a gold-price rise in 2020
Let’s have a closer look at the trends.
Higher debt levels worldwide should drive the gold price in 2020, as well as its corollary, the trend towards ever more politicized central banks. Be it U.S. President Donald Trump’s numerous tweets pressuring Jerome Powell to cut interest rates — and this environment of ultra-low interest rates will not end soon, as I explore in detail in my new book, The Zero Interest Trap — or be it the call on central banks to finance a Green New Deal, or the affirmative answers of central bankers like the new president of the European Central Bank, Christine Lagarde, a politician herself, to this call. The more politicized a central bank gets, the less independent a central bank becomes, and inflation rates can increase. And gold has been, is, and will be the perfect hedge against high(er) inflation.
There is another threat to low inflation rates. In recent months, ideas such as the modern monetary theory, helicopter money and quantitative easing for the people have gained more popularity. All these concepts fall prey to the illusion that printing money, not innovation and hard work, is the prerequisite for economic growth. And as ideas do matter, this shift in public perception makes higher inflation rates more likely.
A pickup in inflation rates would have a tremendous impact on the bond market — precisely, on the bond market bubble. Bonds worth more than US$17 trillion have a negative yield. Higher inflations rates would lead to losses on the bond markets and signify to investors that risk has returned to the bond market, like what happened on the stock markets in fourth-quarter of 2018. Gold will become more attractive for these financially potent investors.
Especially in Europe, but also in the U.S. and China, reports of slower economic growth have become the new normal. These reports are underpinned by the earnings recession, planned mass layoffs and inverted yield curves, while politicians and even central bankers call for fiscal stimuli. It is time to prepare for a recession. But how does gold perform in a recession?
In our 2019 report “In gold we trust,” we conducted thorough research on gold’s performance in the various stages of a recession. Our results are that gold has been excellent at offsetting stock losses during recessions. There is no reason to expect that gold will not record substantial gains and will not act as a hedge against bear stock markets, as well. However, one should be less optimistic about bonds, the classic stock diversifier. High debt, the zombification of the economy, and monetary policy that is still very loose by historical standards combine to undermine the ability of bonds to act as a stock diversifier. Therefore, gold is positioned to remain an indispensable component of the portfolio in the future, as it lets the investor navigate stressful passages in the market with relative ease.
Central banks’ gold purchases change public perception of gold
Gold’s perception has changed dramatically in recent years, and this U-turn will not be undone soon — exemplified by the remarkable shift in the central banks’ actions and communication regarding gold. For many decades, gold has been considered the “barbarous relic” of a time long gone. As gold neither earns interest nor dividends, central banks have lowered their gold holdings step-by-step. Then the financial crisis of 2007–2008 changed everything. In 2008, central banks left the camp of net sellers and became net buyers of gold. This trend has continued ever since.