Sunday , 19 November 2017


Gold Isn’t Going Through the Roof Because of These Economic & Political Realities

Why isn’t gold going through the roof?  [This article looks at the common arguments why it should and the realities as to why it isn’t.]

So writes Axel Merk (www.merkfunds.com) in edited excerpts from his original article8 entitled Gold, a Hedge Against Financial Repression?.

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Merk continues in further edited excerpts:

Let’s look at the common arguments:

1. The Eurozone banking crisis is contained….Given the slow-motion drama on display in Cyprus, markets are likely to remain nervous. As such, holding gold as an insurance against a broader run on banks might be prudent insurance; please consider that the time to buy insurance is when you don’t need it. We are not suggesting there will be a bank run throughout the Eurozone, and we hold our gold for different reasons, but gold we hold.

2. Interest rates may rise. One reason why gold has been trending sideways for a considerable period now is that investors might expect the Federal Reserve (Fed) to embark on its “exit”; the argument is that as the economy grows, negative real rates might turn into positive ones, thus yielding more than gold. We agree that should the world embark on a major tightening cycle, it may spell bad news for the price of gold. It’s a risk investors have to consider. It’s just that we consider that risk to be rather small in the context of the debt burdens outstanding. Many at the Fed believe longer-term, long-term interest rates may converge around 4%.  The trouble with that view is that it may not be possible to finance U.S. government debt, should the average cost of financing move back to 4%; it’s currently at a little over 2%, down from about 6% in 2001, yet our debt is up by trillions and growing. As maturing bonds are refinanced at lower rates, that cost of borrowing continues to trend downward – for now. [Read: The Future Price of Gold and the 2% Factor]

3. There is no inflation. Depending on the metric one looks at, inflation expectations are reasonably well “contained,” although such inflation expectations inched when the Fed decided to embrace an unemployment target. However, the only person, for whom the average cost of living might have been declining just about each year over the past decade, is a person living on their personal gold standard. Yours truly has done that with regard to a college savings plan: the cost of college tuition went down each year, when priced in gold. However, applying historic measures of inflation, such as how the Consumer Price Index (CPI) used to be defined, say in the 1980s, would suggest we have rather high levels of inflation.

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Personally, I hold about half of my non-real estate investments in gold. That’s a high multiple of what many investors assign to the precious metal. The reason I hold gold is because I don’t think we have seen anything yet with regard to financial repression.

What we see unfold in the Eurozone is sad and may boost the price of gold under some tail-risk scenarios but

What we see in much of the rest of the world may, frankly, be more worrisome:

Japan: Japan’s finance minister wants to borrow from the toolbox of the Great Depression in pursuing fiscal policy. The Bank of Japan wants to achieve a 2% inflation rate within 2 years and is about to announce concrete steps to get it there. With a debt-to-GDP ratio exceeding 200%, we don’t see how the bond market can support a 2% inflation rate. Should the Bank of Japan monetize the debt to make it possible, the yen may indeed become worthless. Forget about contagion from Cyprus. Japan, in our view, provides the much more compelling argument to own some of the yellow metal.

UK: The UK is paving the way for incoming Bank of England (and outgoing Bank of Canada) Governor Carney to increase the BoE’s inflation target or to engage in nominal GDP targeting. The UK already suffers from stagflation; again, upcoming BoE’s policy may well have a bigger impact on the price of gold than a typical day in the Eurozone where Italian savers grind their teeth.

US: In our assessment, without meaningful entitlement reform, the U.S. will go bankrupt. We are actually optimistic that entitlement reform will come; however, we don’t think it will come before the bond market pressures policy makers into action. In our analysis, however, the U.S. dollar may be far more vulnerable to a misbehaving bond market than the Eurozone has ever been. Again, the potential fallout – with its implications for gold – dwarf concerns about the Eurozone.

What will trigger all of this? We believe the biggest threat the market may be facing is economic growth. That’s because economic growth might get the bond market to sell off, in the U.S., U.K. or Japan, exposing the vulnerabilities. As long as we have this muddle-through economy, things are “contained.”

We don’t know whether our forecasts will pan out but investors that believe that there’s a risk that some may pan out, may want to consider taking it into account in their portfolio allocations.

Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://news.goldseek.com/MerkInvestments/1364311773.php (To continue the discussion, please register to join us for our webinar on Thursday, April 18, 2013. Also, make sure to sign up for our newsletter as we help make sense of global dynamics and their implications for gold and currencies.)

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