Fascinating Week For Gold: Lots of Moving Parts

This week has been quite a ride for gold, as on Wednesday Pres. Trump warned Russia through twitter to “get ready” if they decide to overly cooperate with the Syrian government, and as we all know gold was off to the races and finished the session up nearly $25.

However, gold settled down on Thursday by selling off some of its gains. As we can all tell, there are a lot of headwinds pointed in gold’s direction ranging from an emerging trade war, capital war, the overhang of unprecedented debt and rising interest rates. The yellow rock has proven throughout history to be quite a unique asset class as its best viewed in the scope of currencies versus investment. In other words, a benchmark against your local fiat currency. The primary reason for this is that unlike stocks, bonds and real estate it does not generate any cash flow which makes it extremely challenging for speculators to tell if it’s undervalued or overvalued by practicing discounted cash flow models.

True gold bugs would push back and say that it has heavy industrial demand as in medicine, computers, and electronics but in reality, those are very small use cases compared to its monetary demand.

In today’s world of negative interest rates and the war on cash, any rational market participant would realize that something has clearly gone wrong in monetary policy as 1) negative interest rates has never happened before in history 2) the war on cash eliminates money in itself and forces individuals to bank deposits. Is this war on cash the transition too steep negative interest rates in the next recession? That definitely seems to be the primary reason as the Federal Reserve in recent months said that negative interest rates are possible if a recession hits. Talk about desperation.

Gold throughout history has served as a very reliable store of value, and the supply of gold is essentially fixed, meaning price fluctuations depends on demand for the most part.

As we can tell in the chart below, gold has successfully enacted as a shield against the erosion of purchasing power via inflation over the last 15 years:

The Gold Telegraph team recently caught up with two very respected individuals within the financial community on Twitter, one was gold analyst Dan Popescu, and the other was macroeconomist Henrik Zeberg Jensen, and they gave us a brief assessment of the gold space at this time:

Mr. Popescu provided a very detailed assessment:

Increased US sanctions on Russia is forcing Russia’s president Putin to react fast. Relations between US and Russia are at the lowest point possible resembling the Cold War at its worst time. It is evident to me that Russia and China have been working on a payment system to circumvent the US dollar. Recent sanctions will accelerate its implementation. An agreement of collaboration between the gold and oil Moscow and Shanghai Futures Exchanges were signed recently and an agreement between the central bank of Russia and of China was signed. Nothing has transpired yet, but I wouldn’t be surprised to find out that there is coordination or collaboration between the 2 central banks as it concerns gold. Both Russia and China consider gold as a strategic asset in their war against the “hegemon” (US) and dollar’s “exorbitant privilege”. Soon after inclusion of the Chinese yuan in the SDR, China stopped reporting any increase in official gold reserves. I find that hard to believe. China is in my opinion still accumulating gold but, on another account, ready to be transferred to the PBOC at a strategic time. Recent sanctions on Russia forces Russia to accelerate its plan of de-dollarization. Gold is part of the plan. Trump’s trade war encourages also China to decrease its use of the dollar. Recent indications show a move away from the US dollar in SWIFT international payments and official forex reserves. Sanctions will not only force Russia to react, but other countries and businesses will try to avoid the dollar. Evidence already shows favoring the euro, “safe haven” currencies like the Swiss franc and Japanese yen and especially the ultimate money: gold. Russia’s official gold reserves already can back 55.3% of its ruble monetary base. It has 17.6% of its international (forex + gold) in gold in 2018. It had 2.1% in 2007. At a gold price of $2,400 Russia backs its ruble 100% (M0); at $5,500 (M1) and at $12,000 (M3). So, both have an interest in higher gold price but especially Russia. Gold has recently broken from a technical consolidation formation within a secular bull market started in 2000 ($250) with a potential technical target of $1,450 by the end of the year. Uncertainty in geopolitics with risk of military conflict is gold’s best friend. We had currency wars since 2008, trade wars since 2018 and it looks like military wars are not far. These are ideal conditions for a quantum leap for gold that can push it even above $2,000. Fed’s past chairman Bernanke recently called the present international monetary system “incoherent” and the governor of the Bank of England Carney in 2011 considered the system at a “Minsky moment”. It is I say in unstable equilibrium and ready to collapse and bullish gold – Dan Popescu

Macroeconomist Henrik Zeberg Jensen provided a brief evaluation:

Geopolitical events tend to only have a short-term impact on Gold price in my opinion. Of course, if the situation spirals out of control, prices could rally much higher. However, despite being the greatest bull on a long-term perspective, I still believe in lower prices before a long-term bottom is in. This, however, will provide an opportunity of a lifetime. – Henrik Zeberg Jensen

It is safe to say that the gold community will be paying very close attention over the next few weeks with all this geopolitical tension in the air.