Gold Heartbeats: Does the Emperor have any clothes?

Goldex Team

Editorial content

Whisper it slowly, whisper it quietly but capital markets are beginning to pay a little bit more attention to the bad economic data being reported and the latest current affairs news.

Of course, the intraday and overnight rollercoaster of tweets and headlines on the US-China trade deal is still affecting price movements here and there. But there seems to be a bigger awareness of the serious challenges that underlie the reality of global economic activity, and we have seen a few hedge fund managers doubling down on their bearish outlook for the foreseeable future (a classic example being Horseman Capital’s Russell Clark)

The return of economic growth

There are indeed many reasons to be structurally bearish but stating intellectual or academic opinions is very different to managing portfolios. However, since the last post we did April production and sales data in the major Asian economies, for example, has not got better but worse.

With increased tariffs and no real sign of progress to end happily these trade wars, it seems unlikely that we will see a roaring comeback for the global economy in the next few months.  But the hope for a much needed resolution, as well as the belief central banks will (as they have done in the past) come to the rescue, remains a crucial component of future price action.

The gold front

Gold prices are once again trying to test the 1,300 ($/oz) level. Any further panic and central bank intervention could see it well through it and into the 1,350’s ($/oz), a roof target which has capped prices for a few years past. Still, any significant volatility in capital markets and the 1,350 ($/oz) may not hold for long.

This can be clearly seen when placing the 6 month and 5 year gold spot price charts together. The medium term upwards trend, and the historical drops after the 1,350 ($/oz) level has been hit in the near past.

The rule is the are no rules

One thing that has not changed is the ongoing trashing of currencies coupled with monetary and fiscal abuse. This seems to be the norm now across the globe. On the one hand we have emerging economies like Turkey planning to tap 40 billion lira from its central bank reserves, as a desperate measure to steady the ship and pull out or recession (!). On the other, we have directly witnessed how easy-going regulatory policy in the US has created multi-billion dollar IPO valuations for companies that continue to make huge losses.

We all know how Lyft and Uber IPOs have gone, but there are plenty of similar lesser known stories out there… go check some of the crazy valuations attached to cannabis related companies in Canada. Regardless of their potential, these are not healthy signs.

The geopolitical cocktail

Looking at international geopolitics the news have not been too encouraging for the global economy. The rhetoric between China and the US is becoming more hostile. Add to that the increased tensions with Iran and the escalating social and political volatility in Venezuela. Plus an additional sprinkle of trade frictions between the US and the EU, as seems apparent to happen in the coming weeks. Furthermore, European elections will most probably show another surge of support for anti-globalisation and far right political parties…

The post-Cold War system, indeed the post-WW2 system, has never looked so precarious.

And yet, the prescriptions from the policy experts remain the same… it is therefore not surprising to read how Neel Kashkari, the Minneapolis Fed chief continues to argue in favour of low interest rates as the labour market heals. At its core essence, the policy prescriptions are more of the same, but are given a different justification. Rates should not go up in order to help increase wages and reduce inequality.

Thus, more central bank, top down intervention is the medicine for every economic ailment. Just print more money because there is no inflation they argue! But inflation there is…

The ghost of inflation

As discussed in previous posts, inflation lives in asset prices. And as history shows inflation is non-linear. It doesn’t just go up slowly. When it finally cascades into other components, and it will if these policies are continued, price surges will be sharp, quick and exponential.

Markets are slowly starting to realise that the policies of central banks and governments have a decreasing impact, a lower “bang for your buck” ratio. China has thrown stimulus after stimulus and each time, especially this year, has felt increasingly powerless to support the economy. It is therefore surprising to see how policy makers continue to insist on the same quick fixes. What ever happened to investment in skills and education, to meaningful labour reforms or to business regulations improvements? The old classic policies seem now forgotten and out of favour.

One thing we know for sure: if the economic data continues to decline at this rate, the calls for further stimulus will once again be answered. The story goes that once the genie is out of the lamp, it is almost impossible to get it back in…



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 it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.