Reorganization of the global monetary order considered a ‘grey swan’
Trump’s announcement late yesterday that the US would be pulling out of the landmark 2015 Paris climate accord saw gold prices retreat. Markets are now awaiting the release of the non-farm payroll data. General consensus is that 210,000 new positions were added in May. However, this could be an underestimation given the stronger ADP number yesterday.
The Paris climate deal, jobs numbers, elections and terrorist attacks are all important ingredients in the tale of an economy. But they should not be considered individually when considering the gold price or gold investment. They all come together to form a far more complex story, which is the global financial and geopolitical system.
Yesterday Incrementum’s widely respected In Gold We Trust report was released. The authors do a stellar job of considering not only the wider picture but also what we can learn from history. This is refreshing in an age when many mainstream, day-to-day analyses look for individual bullish and bearish signs for gold, when in reality all the signs need to be considered together.
The report covers a multitude of angles and considers even more economic, financial and political factors. As we often conclude, investors should not focus on small events but rather look at what they all point to and why they are happening. This is in contrast to the mainstream media who often can’t be considered to do this. Perhaps we should not be surprised by this, an academic study released last month found journalists have ‘a lower than average ability to regulate emotions, suppress biases, solve complex problems, switch between tasks, and think flexibly and creatively.’ Oh dear!
Perhaps we can now understand a little better why we fail to spot much coverage in the mainstream of the underlying dangers in the financial system and how investors and savers can protect themselves. With this in mind we suggest you enjoy the highlights of the In Gold We Trust Report, below and continue to take the mainstream financial media with a pinch of salt.
Frustrated with gold? Blame Trump
The gold price was having a great time in the first half of last year. Long-term we believe we know where it is headed and it looked like, in 2016, that it was well on its way. Then something happened and it changed its mind. Why? Incrementum’s authors Ronald-Peter Stoeferle and Mark Valek argue that ‘ironically’ Trump ‘was the trigger of the sudden reverse thrust of the gold price.’
Ironic on account of Trump’s anti-Wall Street rhetoric and the seeming mutual distrust between the then President-elect and the financial industry. However Trump won by giving new hope to ‘ a class of society that had lost its trust in the economic system and political institutions.’
As a result of this new found euphoria in the US and global economy, ‘stocks received another boost, and the increase in the gold price was (temporarily) halted… A fantastic first half [for the gold price] was followed by a disastrous second half, where the newly won confidence was brutally destroyed. Gold bulls were being tested again, with the market turning into a “pain maximiser”.’
‘The big caesura in the performance had to do with the election of Donald Trump.’
Trump is merely one character in this play, he came to the stage when the story had already been laid out – an economy of bubbles, inflationary monetary policy etc etc. Trump could be seen as someone merely hurrying along the inevitable. Stoeferle and Valek both recognise this and consider the other characters, props and scene changes in what may well turn out to be a tragedy.
The Everything Bubble
One of the major areas that was inevitable no matter who is in the White House is the US Equity market. Rarely do you hear gold investment advocates recommend the classic investment portfolio which ‘calls for shares to satisfy the risk appetite and bonds as safety net.’ When people invest in gold it is not to get rich quickly, it is to diversify their portfolio, hold some financial insurance and to own a safe haven with zero counterparties.
The authors of the In Gold We Trust believe the classic investment portfolio ‘must be critically questioned’ on account of a bubble which reaches beyond individual areas. Renowned analyst Jesse Felder calls this the “Everything Bubble.”
‘The valuation level of the US equity market is nowadays ambitious, to put it mildly – both in absolute numbers and in terms of the economic output. This prompts the conclusion that the U.S. is caught up for the third time within two decades in an illusionary bubble economy created by money supply inflation and equipped with an expiry date. In comparison with the earlier two bubbles, however, the excess is not limited to certain sectors (technology in 2000, credit in 2008), but it is omnipresent and includes various asset classes, especially also bonds and (again) property.’
The Everything Bubble means very little remains untouched by the excess in the system. It means there is heightened risk and very little chance of the bubble deflating without drama. Whilst the gold price might appear unresponsive at present, gold investors with segregated, allocated gold should feel assured that they are holding one of the few assets that cannot vanish as a result of a bubble imploding.
Mainstream is wrong about recession
“It is widely acknowledged that a US recession represents one of the greatest extant risk factors for international investors. In our opinion, financial market participants currently display a suspiciously pronounced degree of complacency.”
The authors identify five key measurements that point towards a likely recession, despite mainstream opinion.
- Rising interest rates
- Artificial asset price inflation
- Consumer debt and slowing credit expansion
- The duration of the current upswing
- Stagnating tax revenues
For obvious reasons, a recession is positive environment for gold but it is also the fear of a recession which will send the price higher:
‘Upcoming recession fears resulting in a U-turn by the Fed, and the consequential depreciation of the US dollar would probably finalise the entry into a new age of inflation. This will be the moment in which gold will begin to shine again.’
Look out for Grey Swans
We know all about white swans and we know all about black swans (or we don’t, that’s the whole point) but Incrementum introduce us to the concept of grey swans. Grey swans are events which have ‘strong potential to become relevant at some point.’
The main grey swan considered is stagflation, as caused by a US recession, this would have a positive affect on gold. The authors consider the following grey swans and their impact on both the US Dollar and gold:
On a lighter note…beer
Each In Gold We Trust features a look at the “beer purchasing power” of gold. Whilst it may seem a light bit of fun, it is in fact a fantastic way to measure real inflation given official government measures are often misleading. Just by using this simple measure one can quickly appreciate the fake value in fiat money and where the real value lies – gold (and beer, of course).
‘While a liter of beer (a “Maß” in German) at the Munich Oktoberfest in 1950 cost the equivalent of EUR 0.82, the average price in 2016 was EUR 10.55 .The annual price inflation of beer since 1950 thus amounts to 4.2%. If one looks at the price of beer relative to the gold price, then one ounce of gold could buy 111 liters of beer in 2016. Historically the average is 87 liters – thus the “beer purchasing power” of gold is currently slightly above the long-term average. The peak was however reached in 1980 at 227 liters per ounce. We believe it is quite possible that similar levels will be reached again.’
So, good news for those who own gold and enjoy a pint or litre or two, as ‘Beer drinking gold aficionados should therefore expect the metal’s beer purchasing power to increase.’
There is a huge amount of information and analysis in this report, all of which is vital to understand the outlook for gold. Gold demand, the gold price and the overall outlook for the metal cannot be fairly considered without an extensive viewpoint.
Unsurprisingly, reports such as this and well-researched commentary such as our own point to a lot of ‘what if’ scenarios. These should be considered by all readers and those considering any kind of investment. Ultimately the conclusion is the same – we don’t know where this will end up or what the final act will even look like. For these very reasons, gold serves as an excellent form of financial insurance in your portfolio.
Luckily educated and balanced research will use not only a number of ‘what if’ scenarios but it will also base a lot of its recommendation and conclusion on history, maths and overall experience. This is the difference between well-informed, critical research and the policies and reports of the mainstream today. Because of this major difference investors are advised to hold gold and silver as we face unknown outcomes, with very few options that will allow us to protect ourselves before reality strikes.
News and Commentary
Gold slips as US data lifts dollar, boosts rate hike prospects (Reuters)
Fed’s Powell Has an Eye on Inflation as He Calls for Rate Hikes (Bloomberg)
Gold steadies as U.S. private-sector jobs data bolsters dollar (Reuters)
Trump to Withdraw U.S. From Climate Accord to Seek Better Deal (Bloomberg)
U.S. factory activity edges up; private payrolls surge (Reuters)
66-year chart of beer vs gold price may lead to (heavy) drinking (Mining.com)
Deutsche Bank Calculates The “Fair Value Of Gold” And The Answer Is…(ZeroHedge)
Hedge Funds Pile Into Gold At Fastest Pace Since 2007 (ZeroHedge)
Want to Know Where Gold Is Headed? Keep an Eye on the Japanese Yen (Bloomberg)
Perth Mint’s monthly gold, silver sales rise in May (Times of India)
Gold Prices (LBMA AM)
02 Jun: USD 1,260.95, GBP 980.39 & EUR 1,123.88 per ounce
01 Jun: USD 1,266.15, GBP 984.81 & EUR 1,128.01 per ounce
31 May: USD 1,263.80, GBP 987.79 & EUR 1,129.96 per ounce
30 May: USD 1,262.80, GBP 982.46 & EUR 1,132.23 per ounce
26 May: USD 1,265.00, GBP 983.41 & EUR 1,127.87 per ounce
25 May: USD 1,257.10, GBP 969.48 & EUR 1,119.57 per ounce
24 May: USD 1,251.35, GBP 963.29 & EUR 1,119.58 per ounce
Silver Prices (LBMA)
02 Jun: USD 17.19, GBP 13.37 & EUR 15.33 per ounce
01 Jun: USD 17.13, GBP 13.33 & EUR 15.26 per ounce
31 May: USD 17.31, GBP 13.48 & EUR 15.43 per ounce
30 May: USD 17.27, GBP 13.42 & EUR 15.49 per ounce
26 May: USD 17.29, GBP 13.45 & EUR 15.41 per ounce
25 May: USD 17.15, GBP 13.23 & EUR 15.29 per ounce
24 May: USD 17.03, GBP 13.14 & EUR 15.22 per ounce