The first whiff of future tightening from the US Federal Reserve has sent bullion into a nose-dive, triggering a much-feared “Death’s Cross” sell signal on gold futures. Gold has dropped by over $100 an ounce in ten days, touching $1556 this morning.
Economic recovery has yanked away the key support. So long as there are no big “street riots” this year, investors will stop buying precious metals as Armaggedon insurance and rotate instead into stocks that generate income. Such at least is the argument.
This is more of less what the market would look like and feel like if the gold rally really were to fizzle out, leaving behind an army of small investors who joined the party late and face deepening losses for twenty years – as they did from 1981 to 1999.
If it were true that the Fed is preparing to unwind QE, I would agree – up to a point – that gold faces a nasty squall. But all we had from the minutes was a comment that an undisclosed number of FOMC voters fear inflation and financial bubbles and think the Fed should stand ready to cut back on bond purchases earlier than thought.
How many times before have we heard “exit talk” from Fed hawks? We know who they are.
All the indications point the other way :
- The US faces fiscal tightening equal to 2pc of GDP this year at best
- Japan (still the world’s biggest creditor) it has imposed a new policy mandate on the BoJ that implies massive easing over the next year
- The world economy as a whole is still in the grip of a deflationary vice
- There is still a glut of capital sloshing around (and ready to go into gold) and a dearth of consumption
- China’s investment is still running at 50pc of GDP, and its consumption is just 36pc, the most distorted economy in modern history
- The international trading system is still out of kilter
- We remain in a 1930s slump. Until this is overcome it is a fair bet that the Anglo-Saxon central banks and their OECD allies (basically everybody except Frankfurt) will stay uber-loose to mitigate the damage. The world’s policy-making elites know this, which is why central banks bought more gold last year than at any time since 1964.
- Chinese don’t declare gold purchases, but it is an open secret that are buying on every dip.
So hold your nerve. The reality is that we have been moving for several years to an informal Gold Standard in which gold takes its place once again as a central store of value – a currency of sorts – in the mix of sovereign reserves.
Reproduction, in whole or in part, is authorized as long as it includes all the text hyperlinks and a link back to the original source.
The information contained in this article is for information purposes only and does not constitute investment advice or a recommendation to buy or sell.
