Regular readers know I’m no fan of gold – “paper” or otherwise.
Simply put: it’s useless. It has value only because mankind believes it does and theoretically, it could lose its luster (figuratively) overnight if, for whatever reason, everyone collectively came to the conclusion that some other finite thing that can be hoarded is preferable as a “store of value.”
With apologies to anyone who has dedicated their life to the study of gold as a timeless inflation hedge/safe haven/doomsday stalwart, that’s just all there is to this debate (don’t @ me).
But, in the meantime (i.e., between now and the day when everyone decides that some other finite physical thing is prettier than yellow doorstops), we’ll all pretend that gold has value and as long as that lie is treated as gospel, gold analysis will still generate interest (even if gold itself doesn’t – get it?).
And so, on Thursday, everyone will presumably write about Goldman raising their price target on gold to $1325, $1375 and $1425 over 3, 6 and 12 months versus previous forecasts of $1250/toz, $1300/toz and $1350, respectively. In case you can’t figure out what that might look like if you plotted those three price points as grey squares on a chart, here’s a visual:
(Goldman)
So there’s that and here’s this, where “this” is gold (in the top pane) gold’s monthly performance versus the S&P in the middle and gold ETF holdings in the bottom pane:
(Bloomberg)
As noted last month, gold performed well late last year despite a steady dollar (this was before the bottom fell out for the greenback) and resilient real rates. That’s a testament to the notion that the “inverse real yields play” doesn’t always apply late in the hiking cycle when, to quote the President, “the outside world is blowing up around us”.
Don’t forget the following chart from a December 3 Goldman note:
(Goldman)
The bank’s Jeff Currie reiterates that on Thursday. “As we have been arguing for some time now, gold’s performance is not being strictly driven by US real rates (or USD) but rather, we find that as the hiking cycles matures, the usual (negative) correlations between these indicators and gold starts to weaken, or even turn negative”, he writes, before again flagging the obvious rationale which is that in environments where rising real rates are sapping demand for risk and rate hikes are stoking fears of a downturn, “gold begins to price much more off fear of the next recession than off the opportunity cost of holding gold, or the purchasing power of investors / EM households.”
That, Currie says, will the predominant driver going forward. To wit:
As such, we continue to believe that going forward gold will be supported primarily by growing demand for defensive assets, with a slower pace of Fed rate hikes in 2019 boosting demand only marginally. In addition, we note that the same is also true of central bank buying, with rising geopolitical tensions incentivizing more central banks to re-enter the gold market.
You can take that for what it’s worth which, I guess, is it’s “weight in gold” – or not.
Over half of the world’s population (women) love it. People in emerging economies love it. Why? I don’t know, but that’s how it is. Gold will be visiting $1400 fairly soon IMHO….thanks.
Love your passion H but the age old question somewhere around 6000 years is always the same, why have kings, kingdoms, wealthy, poor, banks, central banks and eventually every Tom, Dick and Harriet run to it in times of recession, depression, war and so on and so on. They must all be wrong????????????? Yep, the doors must be stopped.
History tends to be written by the Victor not the Vanquished.. Ask the later what occurred when they moved on after losing a war and being expelled with a suitcase full of worthless fire starter. I remember my mom’s cynical jokes as she tried to light her coal stove with some currency when I was only four… The take away is ‘depends if you think you will ever be vanquished ‘…
I’m a woman and oddly I agree that it’s just a metal. Too much environmental damage to mine it. And for what? To make ingots and bury them somewhere in vaults. A monument to human madness.
Anyway until it’s considered a store of value, like a box that contains dollars, it will be bought when markets smell troubles. You need a really pessimistic view to buy gold, like: if I park cash in a bank the bank could default and I lose my money ( I speak of millions, not the small sums protected by law).
Or: I could buy bonds but maybe the US defaults. And so on.
Probably those who buy it are the same guys that purchase atomic refugees in New Zealand.
But there could be another reason for the rise. EM Central Banks usually enter into gold swaps with the Fed, ECB, BoE. They do it to get dollars, in fact they borrow the gold with the swap, sell gold, get dollars, and defend their currency, like last summer. Technically a gold lending is treated as gold that is still in their disponibility by Central Banks, so in the Central Banks balance sheet you always see the same amount of gold held, no change. I read reports and reports on gold, it seems only a few participants/analysts are aware of this dynamic.
When things are again quiet, then the gold swap is unwinded, Central Banks buy back the dollars, use them to purchase gold sold some months earlier, and close the gold swap. Hence the rise.
Some of us are old enough to have watched Twilight Zone, The Rip Van Winkle Caper. It’s only a matter of time, and maybe a little less anti-science bias….
Gold has value because there is a major investment of time materials and money to mine it, process it and form it into a storable and saleable item. It will not go down to a value where the mines lose money when they sell it. They will simply hold it back until the cost goes back up. This will always be the base value of the metal. It is a great holder of value because if inflation raises it’s ugly head and the dollar drops in value, gold will rise in value to match the true value of the effort to produce it. It can rise in value due to demand if in short supply, the same as any commodity. But the spikes in price usually return to the real value in time. I have a feeling that Mr. H wouldn’t throw his doorstops out with the trash if the dollar became valueless and gold soared.