There appears to be a unsure carrying on over the preceding month between the powers proclaiming a nascent economic recuperation and those that believe there is still a longsighted road of economical contraction and expanding unemployment still ahead. Reality be told, gold is expected to shine regardless however this finally runs down.
Gold bears remarkable resilience over the past year, despite claims from some quarters that broad-based deflation was expected to weigh on all commodities including the resilient gold. We on the other hand have systematically maintained that the major economic forces in the world were just not going to let that befall.
Through monolithic fiscal stimulus package, close to zero interest rates, bailouts and assorted liquidity strategies, the global economic system is awash in currency. This isn’t to say we are out of the woods as yet, simply if things take another turn for the worse, monetary authorities around the world will once more address whatever means are at their disposal to prevent a deflationary spiral.
For those countries with rates of interest at or near zero percent, there’s not much more they can do on that front. All the same, when it comes to printing money and funneling into the economic system, they really have no boundaries. But, there are consequences.
In the US and UK, the governments have turned to quantitative easing as a means to force back the effective borrowing rate lower still. In fact, a recent study by the Fed learned that an appropriate interest rate based on unemployment and inflation would be -5.0%. Other countries are thinking over similar unconventional policies.
Their goal is to produce an environment conducive to the antithesis of deflation, which naturally is inflation. Be assured, they’ll accomplish that goal.
Are the economies of the world bouncing along a bottom at this point, or is this merely a brief respite before the next round of awful news? Most traders will assure you that picking bottoms is a fool’s game. I agree, and I believe you can employ that same thinking whether your talking individual stocks, commodities, gold or macro-economic trends.
Physical gold is going to continue a critical factor in the modern portfolio in either case. If the global economy does carry on to contract with even higher unemployment rates still to be seen — and all the damaging implications of that — gold will proceed to serve as significant diversification versus the more traditional asset classes that would suffer under this scenario.
This scenario also puts the banking industry under considerable extra pressure, maybe even beyond the worse case scenarios of the much discussed bank stress-tests. Gold provides protection against the possible reemergence of broad-based systemic risks.
On the other hand, if the economy is indeed on the mend — as the stock market seems so desperate to prove — gold will once again reestablish itself as the classic hedge against inflation.
We’ve seen inklings of that this week when both stocks and gold have rallied in tandem. Suggestions of recovery, be they false or not, are going to bring the specter of inflation back into the investor’s awareness.
Upon recuperation, whether it’s happening at once or whether it does not happen until the following year as most economic experts believe, there is simply no way for all the liquidity to be drained out of the system quickly enough to prevent substantial inflation. Of course the government will not risk constraining monetary policy too soon, raising the risk of hyperinflation as they wait to be sure a recovery is afoot.
The funds may already be trying to front run confirmation of higher inflation, building positions in gold under the assumption that their risk is restricted even if they are ultimately proven wrong. Gold will then be supported by resurgences in risks to growth and systemic risks.
Not a bad scheme, with gold still well over a $100 off the all-time highs. By the time we see that first big jump in CPI or if some other big risk event — and there are enough out there — turns things the other way, gold may have to be purchased at much higher levels.
