How high will gold go?
In the past 24 hours or so, pundits like Russ Mould of broker AJ Bell haven’t been shy of mentioning the all-time high of US$1,900 per ounce. Why? – because gold price has rocketed past the US$1,700 mark, and the momentum shows no sign of slowing down.
And, although the world is never short of gold bugs making fantastical claims for the metal, this time there is method in the madness.
Investors with sharp memories will recall that at the beginning of the crisis in 2008 the gold price initially slumped as investors covered off their initial losses with the one asset that was still holding up well – gold.
That selling pressure dampened the price of gold for a couple of weeks, just as it did in the middle of March this year as the coronavirus panic took hold. But, both in 2008 and now, once two points of no return were reached – when losses became too great to cover, and when the amount of gold held by investors willing to sell was exhausted - the price recovery was swift, and spectacular.
In the past couple of weeks, gold has gone through five year highs, six year highs, and now seven year highs. So why wouldn’t the pundits start talking about that US$1,900 all-time high, hit back in the early part of the last decade?
After all, although the manner of the crisis is markedly different, in many respects the policy responses are the same. Governments are printing money hand over fist, balance sheets are expanding, other asset classes are in freefall, although precisely how much freefall depends on what currency you measure the decline in.
The USA is set to create more than US$2tn in new money over the coming months, almost all of which will be pumped into the bond markets. The prospect of such a heavy-hitter coming into the market as a major buyer is in turn helping to keep US treasuries buoyant, relatively speaking. And that in turn is supporting the dollar which, as the global reserve currency also enjoys some support in normal times as the currency of last resort.
But these are not normal times. Not by any means. And if you choose to value your assets not in dollars but in gold, as the world’s investment community always used to do, then the decline in asset valuations looks a lot more stark.
So, is the Fed pulling a fast one? To some extent it depends if you view the magician as a fraud or as an entertainer.
There can’t be much doubt in anyone’s mind, looking at the daily diet of news being consumed globally, that a huge amount of value is being lost everywhere. And yet, if the dollar seems to be holding up, as almost any reading of the DXY argues [https://www.bloomberg.com/quote/DXY:CUR], then the measure of the value being lost must be sought elsewhere.
It’s in gold that investors find their most honest readings of the value that’s being wiped out or, to put it another way, those who want to preserve their assets and to avoid the across the board depreciation that’s sweeping every other sector are piling into gold.
That in itself is something of a magician’s trick too, since the more people that want gold, the higher the price gold. But in this case the asset class in question, gold, has a pedigree of storing value that goes back more than 6,000 years. The dollar, which has been around not much more than 200, has lost a huge amount of its value over that time to inflation in a way that gold never could. True, the threat of inflation now isn’t imminent. Or at least not in the way it’s fashionably measured, using metrics like the CPI. But if there are more dollars around, they are worth less. That’s not even economics-101. It’s just basic common sense. And that’s why the pundits aren’t crazy this time round with their talk of new records for gold.