Goldex Heartbeats: 2019 Year in Review

Goldex Team

Editorial content

A common theme in Heartbeats this year has been the slow, gradual erosion of supranational institutions that have governed and facilitated the era of global trade and globalisation for over 50 years. One such organisation, the WTO, has now had its clout severely diminished in another incremental step back towards more mercantilist politics. The court that presides of appeals, the primary body that hears and settles trade arguments has been shut down, due the blocking of new judicial appointees, albeit temporarily:

WTO chief: ‘Months’ needed to fix disputes body

Couple this with the never ending US-China trade tensions, and the increasingly more prominent EU-US trade issues and it is clear to see, slowly but surely, that the global political and financial architecture, so taken for granted, is becoming far less open.

These fractures are again being seen in the economic data. In Germany, industrial production fell 5.5% year-on-year in October. This was the lowest reading in ten years.

In China, corporate defaults could make a new record:

Two China Firms Miss $526 Million Bond Payments as Woes Grow

And as Larry McDonald (@Convertbond Twitter) points out, credit usually leads equities:

The disconnects between economic reality and major equity indices continues, thanks to the perception that Central Banks will always save the day. This is now the longest US Bull market with a major correction ever:

In private markets the exuberance continues (via CollerCapital.com) with high expected returns seen for the foreseeable future by the majority:

The crowding in Private Equity assets is significant despite an almost doubling of assets in the industry:

The below article leads with the classic line from Barton Biggs: “There’s no asset class that too much money can’t spoil”. Prescient words indeed.

‘Peak’ Private-Equity Fears Are Spreading Across Pension World

The problem with illiquid investments is that they “valued” by a handful of people, who may have a conflict of interest instead of being “priced” on a continuous basis in public capital markets. Illiquid values tend to be “fair” until there is a rush to sell. Property is a key example and the below demonstrates:

M&G suspends £2.5bn property fund as assets plummet

Many, including the fund manager, are blaming Brexit. But it seems unlikely that is the only reason. Ultimately, for the valuations to be recognised there has to be buyers at that valuation. Clearly there are no buyers, leaving investors stranded.

With so many illiquid at historically high valuations any disturbance in markets that causes redemptions will have a cascading affect, further reducing valuations. As a former trader once famously said “most investors don’t sell when they should, only when they have to”.

This will be the same come the next crisis. All the investors who are underweight Gold will be forced to buy. And they will sell everything, at any price to raise the cash to do so.

Gold in 2019 – a summary

After oscillating sideways between £900/Oz from June 2016 and £ 1,060/Oz till June 2019, gold prices started moving higher and reached a 10 year high on £ 1,278/Oz in early September 2019. Since then, Gold prices have been moving down to £1,126.38/Oz. This marks an approximate increase of 14% for the year. The change in price reflects not only global gold prices, but the change in currency. The overhang of Brexit has severely impacted the GBP and thereby having a positive impact on gold prices in pounds.

Gold in 2020 – an outlook

Going forward, global growth is likely to struggle as highlighted above. Experts forecast that the impact of Brexit could pull down the UK’s GDP by close to 0.25%, which could impact the pound. Meanwhile, the impact of the trade war could result in a severe slowdown in global trade and thereby shrinking global growth significantly; hence, gold prices are expected to move higher during 2020.

This moment may come soon, it may take a while, but it will come. Until then, central banks and politicians will continue to intervene in the market in more and more forceful ways. And they will do so with increasingly spurious justification. This can be seen in the new ECB president putting the climate crisis at the forefront of central bank policy. Once policy makers have more power, it is very difficult for them to hand it back, or others to take it back.

Meanwhile, the consumption pattern of gold is changing: the demand for jewellery is going down, but investment demand for bars, coins and exchange-traded products is rising to more than compensate. When the economy is not doing well the jewellery demand is likely to go further down as buyers refrain due to uncertainty in income, but the investment demand goes up as traditional assets are expected to provide lower returns compared to gold prices. The investment demand will likely continue to go up during 2020 leading to higher gold prices.

Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.