Why gold

Two forces — reflation and fear drive the price of gold. They pull, apparently in opposite directions. In practice, they hint at different intensities of the same phenomenon just in a different stage of evolution. This phenomenon is the loss of value of financial assets. Or better, the risk of it. Reflationary actions are put in place on purpose* for stimulating the economy, keeping it growing and support equity markets. However, it is supportive, counterintuitively, also for gold as the currency is debased. On the other hand, it is bad for debt holders (and good for debtors).

Current days, are also characterised by the circulation of a large quantity of debt, both public and private, way more than before the Global Financial Crisis of 2008. At some point, the rate of growth of the investments is surpassed by the cost of serving the debt taken onboard for those investments (a quick referral here to Ray Dalio's recent work) and a crisis strikes.

So, let's recapitulate before moving to a review of the current situation. Reflationary actions and debt of the crisis are positive for gold.

The period in between these two scenarios is probably the least supportive for gold as, typically, the economy goes well, without increasing monetary support; the equity market gives a lot of satisfaction, and nobody is scared of tomorrow. Even at the exact moment when a crisis strikes, gold is sold off like anything else, just for hoarding cash for salvaging the balance sheets or businesses. Eventually, when the central bank intervenes with expansionary manoeuvres, the price of gold rallies.

As this interstitial period shrinks (between the two consequent scenarios), the case for gold gains its support in a portfolio and, tonight, we had an excellent example of a reflationary hint for a central bank**. Chairman Powell spoke at The Economic Club of New York (full text) and hint that interest rates could be closer to their "neutral" level that largely discounted by the markets. The immediate response of the markets was a rise in the price of gold. This notwithstanding the US economy is still in expansionary mode.

Real time price of gold Nov. 28 2018

The economy is in expansionary mode but many of those forces that supported it in the recent months are evaporating. The effect of the US corporate tax cut is easing. The USD repatriated by the corporations had been mostly used for shares buyback rather than capital expenditure. This supported the courses of stocks short term but is unsure the effect on future valuations. The economy will need some kind of reflationary maneuvering for keeping the ball rolling (and keeping it rolling at least at the same speed that is implied in the current prices). Even a hint of raising the interest rates less than expected is interpreted as dovish then, therefore reflationary.

Personally, I don't see a debt crisis around the corner. Gold is in a good trading range that, actively managed can be full of satisfaction.

I leave you, for tonight, with an old tune as after all it is just the walk of life.

Good night

Federico Polese

* (especially in economies whose debt is denominated in domestic currency and this is seen as a safe harbour like the USD).

** also called a "dovish" comment.

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