Gold: a response to more easing

Following my latest article on the Fed’s situation and a potential QE4 announcement next year if the situation deteriorates, I thought that a little article on gold could complete my overall view. As many other investors, I am trying to figure out where is the final bottom of the commodity. With all this currency debasement happening (and even more to come), I was wondering if agents will start to once again consider it as the ‘real money’ or – such as GS Jeffrey Currie calls it – the currency of the last resort.

The chart below shows the weekly prices of Gold since the late 90s; as you can see it, one ounce of Gold is now trading at 1,132 slightly above its 50% retracement (1,086.56) from a local low of 251.95 reached in August 1999 and a high of 1,921.17 reached in September 2011.

GOldhistory

(Source: Bloomberg) 

Even though many Gold experts are still bearish on the commodity forecasts with a first target at $1,050 per ounce, I am wondering if $1,100 is a good level to start buying as a long term investment. I understand that investors have considerably starting to lose interest as soon as they realized we were entering in a disinflationary-then-deflation area and that it was more interesting to be exposed to US bonds as real interest rates were increasing. As you know, Gold doesn’t distribute dividends or coupons (and also lacks the full faith and credit of most governments) and is only subject to capital appreciation. Hence, a good factor that can explain the majority of changes in gold prices over the past few years is indeed the changes in real rates.

However, if we considered the 2016 scenario of QE4 as a response to the EM meltdown, in addition to an all-in desperate Abe and Europe’s Great Depression, gold could potentially attract more and more buyers in this sophisticated period.

Quick review of Gold inventories figures

According to two main sources – Kitco and World Gold Council – there is 170,000 metric tons of ‘above-ground’ Gold (i.e. Gold that have been mined in all human history), which corresponds to approximately USD 6.8 trillion based on a spot value of 1,130 USD per troy ounce. If we look at the growth of the top central banks’ balance sheets over the past twenty years (see chart below), we can see than we have reached an historical high of more or less USD 16 trillion. Therefore, based on that information, we can easily do the math and conclude that the gold-to-monetary-base ratio stands now close to zero.

CBs

(Source: Bloomberg)

As you can notice on the chart above, we have now entered in a Central-Bank-money-printing area since the Great Financial Crisis and we are struggling to get out of it. As I described in my latest article, I believe that the Fed’s response to the EM crisis will be a QE4. Based on a statistical analysis, it is clear that this one will be less efficient that the previous ones; efficiency of QEs has a sort of logarithmic function until a point where there is no effect to the economy or even a negative effect to it. Therefore, new money into the system could trigger Gold prices to the upside as investors’ faith on central banks will be clearly reviewed on the downside.

Even though global annual gold mine production has risen to 3,000 tonnes in recent years (reported by the World Gold Council) compared to a 10-year production average of 2,700 tonnes, I don’t think it will add further pressure on the commodity price in the medium/long term. Especially now that we have reached a sort of unlimited-printing strategy. In addition, geopolitical pressures and macro conditions in some of the main producers (Australia, South Africa, Russia. see gold main producers in the map below) will slow and perhaps revert that trend in the coming quarters.

GoldProducers

(Source: World Gold Council)

To conclude, my view is that we could see a market’s response to gold as a sort of alternative currency to hold while we try to get out of this monetary debasement. The five-year chart clearly shows a negative trend, but I will try to add some gold in my portfolio at around 1,100 USD as a long term investment (and hedge).

GOldNow2

(Source: Bloomberg)

Leave a Reply