“It Always Pays To Hold Some Gold”
by John Stepek of Money Week
“We have interest rates going up at a clip that’s much faster than
certainly a lot of people, including myself, would have anticipated. I think
the Fed is out of control.”
Central banks are independent, in theory. But that won’t stop the
president of the US from giving his full and frank opinion on their
performance.
Gold Britannias 2019 (1 oz)
Donald Trump reckons the Federal Reserve is to blame for the recent spasm
of panic in markets.
“I’d like our Fed not to be so aggressive because I think they’re making a
big mistake.”
Will Trump get his wish?
Will the Fed respond to Trump’s threats? Or to those of the market?
As I write this, markets appear to be recovering a bit of poise. BTFD (the
excitable version of “buy the dip”) dies hard (although let’s get to the end
of the US session before we make too many judgements about when or if this
wobble might end).
But while the S&P 500 is not yet down 10% (the magic number that
represents a “correction”), both the tech-heavy Nasdaq and the wider Russell
2000 are already in correction territory.
Those are quite chunky falls by recent standards. And that’s just talking
about the US. As Michael Mackenzie points out in the FT, world markets have
really had it bad – the FTSE All-World index, excluding the US, is now down
around 17% from its January peak. That’s almost a bear market (which is
deemed as 20% for essentially arbitrary reasons.)
Meanwhile, gold – that much-detested haven for those
still superstitious enough to fear that economists and central bankers
haven’t quite got all of this figured out yet – had a big bounce, all the way
up to $1,220 an ounce.
We don’t know what the Fed will do. It’s a difficult position for Jerome
Powell to be placed in. If he looks as though he’s caved to Trump, then his
credibility is shot. Yet at the same time, the Fed has a history of
responding to market falls with soothing words.
Powell might have started out talking tough, but is he really going to
feel comfortable standing there with the S&P 500 down 10%-15%, with
everyone shouting at him “do something”? Be interesting to find out.
Say Powell buckles. Markets cheer up. But then inflation gets a clearer
run. And it’s amazing how quickly the narrative can go from fearing an
imminent recession to fretting about an inflationary boom.
Or Powell stays strong. Markets continue to slide. How long does that go
on for before they either wake up and realise everything’s OK – or before
Powell realises that in fact, he is being over-optimistic about the economy’s
capacity to accept higher rates?
Days like these are why you hold a bit of gold in your portfolio
I don’t know what’s going to happen. But to me, this is the point of owning
a bit of gold in your portfolio. It’s insurance. It’s the asset that
goes up when most things are going down. It benefits from two main things:
currency debasement and panic.
So say Powell backs down and, rather than heading for recession, inflation
in fact takes off. Gold would benefit in that scenario, even if most
other things struggled.
Or say Powell stands firm, and it turns out markets are right to panic and
we end up with an economy suddenly crushed under its debt burden. Again, gold
would benefit from the sheer panic and the rush for any liquid asset with no
counterparties.
And if, instead, everything is OK – well, who cares what’s
happening to your gold if the rest of your portfolio is melting up?
However, beyond that, I’d also point out that I fully believe that the
eventual resolution to the fallout from the 2008 financial crisis will be
that we shift to a new monetary regime. That’ll be quite a kerfuffle. During
said kerfuffle, I think owning some gold will also be psychologically
helpful.
Let’s unpack that a bit in the little space we have left this morning,
though I’ll be returning to it here and in MoneyWeek again and again.
Until early last century, currencies were tied to gold.
That made it hard to expand the money supply. It also made it hard for
governments to overspend. So it often got abandoned temporarily – usually
during wartime – but countries did make the effort to get back onto it, as
something of a badge of honour.
But then, in the run-up to World War II and during the Depression, various
countries which had rejoined the gold standard at too high a rate (Britain
being the main one) ditched it altogether. Then the chaos of World War II
came along, and left the US the only developed country with any money left,
basically.
So in the wake of that cataclysm, we got the Bretton Woods system – one
that linked global currencies to the dollar, with the dollar itself pegged to
gold. This ended in 1971, when Richard Nixon (another somewhat controversial
president) took the US off the gold standard.
From then on, we entered the era of purely fiat currencies. Within
countries, money is backed by faith in the government and the economy. And
the global system is backed up by the US dollar.
So in effect, we’ve gone from a strict gold standard, to a very loose gold
standard conducted via the US dollar, to a purely fiat standard, with the US
dollar the global “reserve” currency.
The coming global financial order will involve China as a big
player
As you might have gathered, changes in the monetary system tend to be
accompanied by trauma. World War II; the inflation and political upheaval of
the 1970s.
And of course, we’re now seeing the fallout from the 2008 near-collapse of
the financial system. Funnily enough, right after that happened, there were
explicit calls from Europe for “a new global financial order”. Then the
eurozone crisis hit, and Europe became rather more preoccupied with its own
woes.
But these transitions are not things that are decided at the negotiating
table. They may be formalised there, but only after events have forced
everyone’s hands.
The move away from the global dollar standard is a while off, and it may
be decades before we formally recognise the transition in the same way that
we recognise the shift from Bretton Woods.
But it starts with China turning the yuan into a proper reserve currency.
That would ultimately involve a free float, and the process of getting there
would be highly disruptive and uncomfortable for all involved.
So keep an eye on what China does with its currency.
And also, hang on to your gold.
News and Commentary
Source: ZeroHedge
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Gold Prices (LBMA AM)
12 Oct: USD 1,218.75, GBP 922.11 & EUR 1,052.15 per ounce
11 Oct: USD 1,201.10, GBP 910.31 & EUR 1,040.27 per ounce
10 Oct: USD 1,186.40, GBP 902.02 & EUR 1,033.00 per ounce
09 Oct: USD 1,187.40, GBP 910.26 & EUR 1,036.01 per ounce
08 Oct: USD 1,194.80, GBP 914.86 & EUR 1,040.67 per ounce
05 Oct: USD 1,201.10, GBP 921.48 & EUR 1,045.08 per ounce
Silver Prices (LBMA)
12 Oct: USD 14.60, GBP 11.04 & EUR 12.60 per ounce
11 Oct: USD 14.40, GBP 10.90 & EUR 12.45 per ounce
10 Oct: USD 14.38, GBP 10.92 & EUR 12.50 per ounce
09 Oct: USD 14.33, GBP 10.98 & EUR 12.51 per ounce
08 Oct: USD 14.47, GBP 11.10 & EUR 12.61 per ounce
05 Oct: USD 14.64, GBP 11.23 & EUR 12.73 per ounce