After many false dawns, Gold finally broke through the 1350 level. The reasons, of course, were central bank policy moves and rising Iranian tensions. But the break is clear for all to see: the precious metal hit its highest level in six years.
How many more, and when?
With a July rate cut by the Federal Reserve now 100% priced in by the market, the only question remaining is: how many more they do, and when?
In Europe, the ECB President Mario Draghi once again delighted markets with more promises of further easing, even if some doubt its legality. There were many challenges to the ECB’s quantitative easing when it first started, with some still to be ruled on. In the end however, there is no alternative in the Eurozone as long as there remains no joint debt and more transfer of fiscal powers to the centre. Such policies would not be tolerated by many at this point in time, if ever.
The genie is out of the bottle. And it is very unlikely any German constitutional court has the power to put it back in.
From the always excellent Charlie Bilello:
All the while the global economy continues to slow, with two highlights here:
And this, Singapore Electronic Exports – seen by many analysts as a key indicator for global economic activity – has just taken the biggest nosedive in a decade:
Easy money is back
All around the world, the negative stories are piling up – whether it is the gating of the Woodford Funds or the massive crisis at Natixis Backed H20 Asset Management. This is what happens when managers chase yield and returns in illiquid names because interest rates are so low.
In the end, mathematics and fundamental valuation of assets do matter. It just takes a longer time to get there with all this Central Bank printing. And there is a lot. As Barrons notes, easy money is back.
But did it ever really go away? And what was the point; to stimulate markets or stimulate the actual economy? For a decade, there has been easing of trillions and yet the economy looks shaky. This chart from BCA Research sums up the situation very nicely.
With so many global economic metrics getting worse, it certainly does feel like the sole reason to have a very long bias in a portfolio is the prospect of more easing. And perhaps even more non-conventional measures from governments.
Universal Basic Income and cancelling student debt
The debate surrounding Universal Basic Income and the cancelling of US student debt are cases in point. These are significant ideas, that are gaining significant traction. Once consigned to the fringes, both policies undermine what was previously sacrosanct. The idea that debt should be just be cancelled opens up Pandora’s box. What about the people who paid their own way through university? What about the people who didn’t want to take on the debt and thus didn’t attend university? What about other forms of debt – why not mortgages, personal loans? Who pays for all this?
As for the Universal Basic Income: again, where does the money come from? Will it be printed or perhaps deficit financed? The altruistic nature of these policies belies the fact they cannot be afforded unless money is magicked up from somewhere else.
Perhaps however, the Rubicon was crossed a decade ago with the central bank balance sheet expansions that were so vast and unprecedented. If the perception that QE was for the banks and the financial system, why not QE for the education system or social security? Again, the public are told there are no negative consequences and inflation has not occurred as so many predicted.
Gold has everything going for it
The world is at a crossroads. How countries finance themselves, how they adhere to previous norms of commerce, finance and debt is very uncertain. What is clear, is that for these policies to happen there will more money created from nothing. More dilution, more currency wars, more inequality, more trade wars and more nationalism have so far been the result.
In times of such uncertainty and largesse real, tangible assets should maintain their relative and absolute value versus ever depreciating currencies. As the famous Macro trader Paul Tudor said recently: “gold has everything going for it…I think if it goes through $1,400 an ounce, it goes to $1,700…quickly.”
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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.