Gold In ‘Mania’ Mode Amid ‘Great Debasement’

“Investors [are] united in the belief of eternal repression of interest rates and, more recently, debasement of the US dollar”, BofA’s Michael Hartnett writes, in the latest edition of his popular “Flow Show” series.

Spot gold hit $1,900 for the first time since 2011 on Friday morning.

Deeply negative real rates have pushed the dollar lower and eliminated the opportunity cost of holding the shiny metal, which has witnessed a veritable flood of inflows this year. Precious metals enjoyed their second largest haul ever last week, BofA says.

In addition to the appeal associated with the debasement narrative, gold is also presumably benefiting from haven demand tied to signs that the global recovery may not be as robust as optimists hope.

Throw in incessant escalations in Sino-US tensions, and it’s not difficult to understand why investors are so enamored.

On Friday, nominal five-year US yields hit record lows. “When interest rates are zero or near zero, then gold is an attractive medium to have because you don’t have to worry about not getting interest on your gold and you see the price will rise as uncertainty in the markets are rising”, Mark Mobius told Bloomberg TV, in an interview.

Gold is gunning for a seventh straight weekly gain, another “since 2011” moment. On the year, it’s battling tech for the crown, gaining the upper-hand this week, when the Nasdaq 100 lost its luster amid a cacophony of bubble calls.

BofA’s Hartnett speaks of a “Great Debasement” in his latest.

“Interest rate repression means investors can’t hedge the inflationary risk of $11 trillion of fiscal stimulus via ‘short bonds’, so [they] crowd into ‘short US dollar’, ‘long gold’ hedges”, he writes.

And yet, at the end of the day, beware speculative moves in “assets” with no underlying rate of return.

“What all of this achieves is drumming up excitement around a mania-prone Veblen good”, Bloomberg’s Eddie van der Walt said Friday, in an amusing little bit.

“Soon, dentists and other retail investors will be getting in on the action”, he added. “That makes the rally self-perpetuating… Right until the moment it stops”.


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21 thoughts on “Gold In ‘Mania’ Mode Amid ‘Great Debasement’

  1. “the debasement of the US dollar”

    I’ll never forget Rick Santelli on CNBC foaming at the mouth about this “risk” back in 2009. Gold DID go up, but nothing else he predicted came to pass.

    Perhaps worth remembering today?

      1. On March 5, 2020, Santelli made headlines for stating, after a series of stock declines driven by fears of a COVID-19 virus pandemic, that “maybe we’d be just better off if we gave [the virus] to everybody, and then in a month it would be over because the mortality rate of [COVID-19] probably isn’t going to be any different if we did it that way than [in] the long-term picture, but the difference is we’re wreaking havoc on global and domestic economies.”

        Maybe one to take Judies seat on the Fed board once she takes over ol’ Jays job?


  2. This move was as predictable as Sunrise,,,,,,There will however be a time to close out these positions and that can be extra tricky…
    Hopefully everyone understands this and we need to keep in mind that when ALL else is (or has been) in a mega bubble the rotation is unlikely to exclude Gold forever , especially when alternatives are what they are…. These moves do Slide faster than they Glide …….
    Golds move has been a ( anti idiotic ) hedge due to its inevitability…..

  3. I’m sitting on a pretty large position of GLD option spreads and GDX equity. They rolled Peter Schiff out yesterday which says to me, time to liquidate. When Stockman makes an appearance, it’s too late…

  4. I think the big question now is which rally for gold is this? Gold rallied strongly from 300 before the GFC. In 2008 it rallied on debasement fears but money was so easy and there was so much speculative options to chase that were sexier that gold fizzled. Now we’re on the cusp of MMT becoming the way forward and serious debasement an order of magnitude or two larger than the GFC if you look 10 years out… so when does gold actually peak? Does it get forgotten in favor of other skyrocketing assets? Does it fizzle again only to rally over the coming decade? Do countries revert to backing currency to some extent with gold? There is a lot of unknowns which is ehy as usual holding some gold isn’t a bad idea but chasing this trade is definitely risky. I suspect I won’t regret having some gold in 2030 that I bought the past few years.

  5. Saw this in the post:

    “What all of this achieves is drumming up excitement around a mania-prone Veblen good”, Bloomberg’s Eddie van der Walt said Friday, in an amusing little bit.

    “Soon, dentists and other retail investors will be getting in on the action”, he added. “That makes the rally self-perpetuating… Right until the moment it stops”.

    A “Veblen good.” I can tell that someone went to university. Hilarious! Sounds more like a fool getting paid to be a mouth piece for the establishment.

    The gold market is tiny. The silver market is miniscule. $270T in bonds worldwide, something like that? Equities, say $200T, Real estate, $300T. And the muppets on TV get all lathered up by an asset worth $10T.

    Just checked GDX. $18B. Only $18B!

    This market is not big enough for all the money sloshing around that would want a piece of the action. Toss in the collision of supercycles and the decline of a hegemonic power, and who knows.

    We’re in the early stages of a reset of the financial economy. Who knows what’s going to happen. The status quo is failing and failing us. Gold could end up being one of the best assets of the 100 years. Or not. hahaha

    1. Gold is inherently worthless. If humanity were to reset, we might have just as easily been fascinated with some other finite metal or substance. Gold is not an “asset” either. It’s a historical accident.

      1. Is gold really that finite? I remember the hysteria growing up running out of oil. Price went up, and we developed new tech and found more. Surging gold prices are a double edged sword for gold bulls, great short term, not so much long term.

      2. Yeah , but it’s a Historical accident repeated for several thousand years… Maybe value is in what is allocated by the societies that posses and shed lives and blood for it….Same critique (worthless) could be said for other stores of value used for trade and barter.

        1. Right. They’re inherently worthless too. The fact is, if you can’t burn it for fuel, eat it, or drink it, it’s usually worthless as a rule. In assets, you need an internal rate of return. Otherwise you could end up sitting on a hunk of metal that goes sideways and yields nothing for years at a time. I mean, this is kind of like the Bitcoin argument with me. I’m obstinate about it because people refuse to acknowledge the facts, even though doing so in no way negates gains. There is no shame in admitting that Bitcoin is absurd if you’ve already bought a Ferrari with the money you made from the rally. In the same vein, people should realize that gold is, in fact, mostly worthless. Sure, it has some real world applications, but not nearly as many as all kinds of other metals and commodities. Admitting as much in no way diminishes its utility as a portfolio hedge and it certainly doesn’t negate your gains if you’ve ridden it up. But the problem with people who refuse to admit the facts behind things like Bitcoin and gold is that they are prone to never locking in gains because they steadfastly refuse to admit to themselves that it’s not an “investment” — rather, it’s just a bet. In gold’s case, history has been extremely kind to it, but there is no fundamental reason why that should be the case. Which is why I only use it as a portfolio hedge.

          1. I’ll be darned Dr H……. I think we agree on this one about 90%…. Thanks for shining a light on this as it clarifies what I have felt is the reality for years….Modern man is a political animal subject to a lot of complex misconceptions that can conflict with a pragmatism that may have been more useful two or three centuries ago…
            Me too… on the last sentence ..The miners in my case….

          2. I mean one could argue that electrons are inherently worthless… I mean they aren’t even complete atoms… and yet a whole lot of effort is put into pushing them around and storing up charge in various locations. When they move they generate a return on investment. That is the only way things like gold or bitcoin make any sense. If they generate a value and a return by functioning as units of exchange powering transactions then their motion creates value which lends them to also being stores of value. Gold being a stable metal that is sufficiently rare that it requires minimal physical space to store reasonable comparative value. One could easily argue that salt is still money as it is still universally in demand, the issue being how much volume it would require to store any significant value. As far as any of these items being investments, completely right, they are speculation and bets in the same way Forex trading is, but then there is some argument a whole lot of the equity market is in a similar position. I am not sure owning a share of Tesla is fundamentally much different from owning Bitcoin in that regard. As for locking in gains, yeah I am all for that.

  6. Printer go Brrrrr, gold go Boing! Up 50% since January 2019? Coincidence? And I wouldn’t call it a mania till my mother-in-law asks if she should buy some – she nailed the bitcoin mania to the week!

    That being said, the next few weeks should tell the tale – what’s it gonna be – 1 trillion or 3? A slow, steady climb, or a moonshot? As a wise man once said, “buy the fishook, sell the rhino horn.”

  7. On the bright side, the metal of sexual fiat will fetch a higher price for the unemployed selling jewelry. So gamblers ,pump it up, some poor babies need new shoes.

  8. I’ve been rolling upside calls on GLD since the March crash, it has been a great way to generate income from a “worthless” asset with no yield. Say what you want about precious metals, at least the reasons the group keeps getting a bid make sense to me, I see no logical reason to explain the meteoric rise of some crap stocks like HTZ or, dare I say it, TSLA….

  9. The current situation has exacerbated the contradictory dynamic between normative and relativistic reasoning. Do fundamentals, or normative considerations more generally, matter any longer at all? Perhaps 20-30% of public equities are insolvent zombies, yet their equities trade well above zero. Some inherently worthless Japanese zombie equity has been propped up for decades now. Sexy tech stocks can run at a loss for more than a decade without normative consequence. Gold is a historical accident like Facebook is a historical accident. The world aligned in a such way that some thing was needed to play those roles, and if it wasn’t these particular things it would have been others. Gold has shown relativistic value for thousands of years, so why would that change now? From a financial perspective, it seems we each need to decide whether our theory of value is normative or whether it is relativistic, and apply it consistently.

  10. H–perhaps we can agree that buying gold or Tesla or bitcoin has the characteristics of a bet, rather than an investment. But how about the stock market as a whole? Holding equities can be seen as a bet that the central banks will continue policies that prop up asset prices.

  11. Is it helpful to think of gold as alternate currency rather than as an asset? It’s cumbersome, true, and could one day be confiscated by the government. But it sure looks nice as a hood ornament on my Rolls.

  12. One of the things sustaining gold, as mentioned many times, is the level of real yields. They are a residual–based on nominal yields (suppressed by Fed forward guidance) and inflation expectations which are rising in line with other market based inflation indicators (some more than others). The problem for Gold is this. If the reflation enthusiasm stops and reverses, breakevens are set to head south. If nominal rates follow them tick for tick, then real yields won’t move but if they lag, real yields go up, which the correlation to gold suggests that gold will not hold up.

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