I don’t talk a lot about gold and there’s a reason for that. Here’s something new readers might not expect me to say based on my penchant for playing the boy who cried “black swan”: gold is useless.
It blows my mind that we’ve singled out one shiny metal as the safe haven asset par excellence.
It’s not so much that I buy the whole “barbarous relic” thing. Using the term “relic” suggests that at some point in history there was a rational argument for why something was useful. I mean if it’s a “relic” now, it must have been cherished a long time ago or we wouldn’t be applying the term “relic” to it, right?
Well gold should have never been cherished. It’s just a shiny piece of metal. Yeah, there’s a finite supply of it, but there’s a finite supply of a lot of stuff. There’s a finite supply of Heisenberg, but as far as I know no one is willing to pay $1240 for an ounce of me (if you know of anyone who is, please drop me a line).
The worst thing about the idea that gold is something to own as a safe haven is that if things do go to sh*t, it’ll be even more useless than it is now. Has anyone seen The Road or read the book? Well if we find ourselves in Cormac McCarthy’s apocalypse, no one is going to want your gold because we can’t eat gold, we can’t drink gold, and we can’t burn gold for fuel (no one tell Donald Trump).
Be that as it may, you can of course expect these shiny doorstops to rally in the event Trump takes us ever close to the cold, gray landscape described in McCarthy’s classic novel (there’s so much irony there I don’t even know where to begin).
So for those still enamored with the prospects of owning it as an asset class, here’s some color and a few charts from Citi.
The ‘flight to safety’ bid can be strong for gold during periods of geopolitical upheaval and policy uncertainty. Last year, bullion showed a particularly strong reaction during the run-up and eventual ‘Brexit’ vote in the UK. Gold prices rallied ~25% in 1H’16, doubling the ~13% BCOM commodity index returns over the same period into the EU referendum vote. With Marine Le Pen’s anti-EMU, anti-EU and anti-status quo rhetoric well established, the risk of ‘Frexit’ would be tangible should the National Front candidate win or finish second in the first round of voting in April. The net result of such a development should be bullish gold, where Citi already assigns a fat tail ‘wildcard’ probability of 25% that the yellow metal could rise to $1,300/oz. in 2Q/3Q. While a kneejerk reaction to such an electoral outcome might also be Euro negative and USD positive, weighing on bullion pricing through US dollar denomination effects, it seems plausible “safe haven” inflows and tail risk hedges favoring gold could coincide with a strong USD, at least in the short-term.
Gold is also the commodity most sensitive to changes in interest rates and bullion should keep rising if US rates continue rallying on Trump policy uncertainty or a French election surprise to the hard right. If US 10s were to rally a further 25-30 basis points (akin to a Brexit move) to ~2% from ~2.35%, gold prices would probably rally towards our $1,300/oz.