By Abdul Samad –

“Gold”, in leman terms is a substitute for money. It also bears a lot of significance, especially in the South Asian region, both as a saving and forms of wearables. Ownership of gold has a great influence on prestige and social class of individuals, especially in Asia.

The other as aspect of gold is its significance as a commodity, in the global investment and trading community. Historically, there have been arguments for and against investing in Gold.  Warren Buffett, the oracle of Omaha has this view,

“I have no views as to where Gold price will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot – and it’s a lot – it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.”

The premise of the above quote is very simple and straightforward. Gold has its limitations to generate value and growth as opposed to equity investments. For example, if someone buy’s 1000 shares of John keeles today, there is reasonable certainty of dividends for the shares. Further, the investor also has the opportunity for wealth creation in the form of bonus shares and right issues that the company may decide to reward to its investors. And of course there will be capital gains in the value of shares over time. Hence, it provides multiple sources of wealth creation.

On the other hand if someone buy’s 100kg’s of gold today, it will remain to be the same in ten, twenty or hundred years. The only form of wealth creation comes from capital gains in price, depending on the cyclical pricing of the commodity. Gold has traditionally been viewed as a “safe haven” investment or as a hedge against inflation.

Generally, three factors drive the price of gold overtime,

1. The global geo-political climate
2. Monetary policies of major central banks
3. The technical posture of price in the trading cycle

The objective of this article is to articulate the above three factors in the present global economic eco-system.

Gold price overview-   

Gold prices rose in 2009, the year after the worst financial crisis since the Great Depression, gaining about 24% by year’s end. But much of the stage was set in 2008 for gold’s rise in 2009 – and for the next few years – when the global financial crisis was entering its darkest days.

To recap what happened in the last quarter of 2008, the U.S. Treasury seized control of mortgage lenders Fannie Mae and Freddie Mac in September 2008 and said it offered$200 billion cash injection for firms dealing with mortgage default losses.

The U.S. government began working on bailout plans in October 2008, which was the depth of the global financial crisis. At its December 2008 monetary-policy meeting, the Federal Reserve took several actions to stabilize markets and the economy. First, it voted to reduce the Federal Funds target to a range of 0% to 0.25

Second, it formally launched its first round of quantitative easing in December, saying it would buy up to $600 billion in agency mortgage-backed securities and agency debt. At the March 2009 Federal Open Market Committee meeting, the Fed further expanded its balance sheet by purchasing an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to $1.25 trillion at the time. Richard Baker, editor, Eureka Miner, said the QE program helped to put a floor under gold, and really all asset prices.

“It was the start of the big reflation period,” he said.

Gold prices are still above their December 2009 levels, but are down significantly from their all-time nominal highs set in 2011.

We’ve almost gone full circle. It’s true in dollar price, but also gold’s relation with copper, silver, oil, is roughly the same when we started out in 2009. It’s almost like a big normalization going on,” Baker said, as the Fed is ending its quantitative easing program.

Interestingly, gold price rose steadily from the year 2000-2009. This was from about $272 Oz to around $1087 Oz. Post financial crisis period of 2009-2011 saw the price move skywards to $1900 Oz from a close of 1087 in 2009. The rate of increase was phenomenal.

The Federal Reserve started gradually phasing out of its QE program which saw the beginning of a down trend in prices. Gold, hit a low of $1070 in the year 2015 as result. But, it back-up currently trading close $1300 Oz levels.

Monetary Policy

As mentioned above, at the height of the 2008 global financial crisis, Central banks across the world lead by the Federal Reserve, embarked on an unprecedented monetary policy. It was initiated by the then Federal Reserve chairman Ben Bernanke. It was officially termed as instilling confidence into a credit crunch market.

In truth, it was to protect the global financial system from collapsing. Lehman Brothers, one of the leading investment banks went bankrupt at the time. Likewise, most leading financial institutions were on the brink. The term “too big to fail” was used as a justification for the bail out. This unprecedented policy making resulted in currency devaluation to levels rarely seen. It acted as a catalyst for gold’s meteoric rise to $1900 Oz in 2011.

Although, the Federal Reserve since then has raised interest rates two times on the back of strong economic performance. It is also worth mentioning, that other central banks around the globe still continue to have a highly accommodative monetary policy lead by the European central bank, the Bank of Japan and Bank of China.

As Gold is a Dollar denominated asset, the phasing out of the QE policy by the Federal Reserve has had a negative effect on gold. From the highs of 2011 it embarked on a downfall journey visiting low’s of $1070 Oz in the year 2015.

The emphasis is to realize that monetary policy of Global central banks has a profound effect on the behavior of gold prices.

Technical trading posture

Considering the prices from the year 2000 to the present day, gold has come a full cycle in trading. From the year 2000 to 2011 gold provided gains year on year consistently. Form the 2009-2011 the rise was phenomenal to say the least.

Every asset class, be it stocks, ETF’s or commodities has a trading cycle. For example, the Dow Jones, the benchmark index of the New York stock exchange currently trades at an all time high of 20,000 points. The Bull market in stocks almost nearing a decade from the low’s of the financial crisis.

Likewise, all major Stock indexes around the globe are trading in highly dangerous territory. FTSE, the bench mark index of the London Stock Exchange, is currently trading at 7000 levels. Further, Bank of Japans unprecedented monetary policy has propelled the NIKKEI to dizzy heights of 18,000.

Company valuations, led by a tech boom are increasingly scary. For Example, the parent company of Snap Chat, Snap Inc, recently listed on the New York Stock Exchange at valuation of $24 Billion. This is a company that is yet to record a profit.

The above information provides an interesting insight. While, equity valuations have seen major rise gold has hit new lows. Technically, how much further the indexes can rise is questionable. What’s evident is, a crash is coming and a DRASTIC one at that. This provides a perfect platform for Gold prices. When money flows out of equities it has a profound positive impact on gold prices.

Cyclically, gold has a very favorable technical posture when compared with Equity and currency markets. Recent remarks by president Trump on the dollar suggests it’s too strong for America’s liking. With Trump’s vision to bring back manufacturing jobs, it is inevitable the Dollar will come down. It’s currently trading around 100 levels which by in itself are all time high’s level. A falling dollar in most cases results in higher gold prices. Mainly as it is dollar denominated asset.

Global Geo-Political stage

Fundamental appeal of gold as an investment is its safe heaven attribute. This was highly visible during the Gulf war and in the 9/11 attacks when gold attracted massive cash inflows.

The current geo-political stage is no different. Lead by a vote for Brexit, the Middle East crisis, North Korean nuclear crisis has cumulatively set the stage for a highly volatile political stage.

The two years of the Brexit negotiating process is set to deliver unbearable and unheard economic shocks that will be a catalyst for Gold prices. The instability of the European Union as the biggest trading block and the instability of the Euro currency itself will be a catalyst for favorable Gold prices.

Further, the present global political stage is occupied by some of the most unpredictable and dangerous leaders in political history. Trump for the U.S.A, Vladimir Putin for Russia, Xi Jinpin for China, and Narendra Modhi representing India represent personalities with extreme political ideologies. 

The world has become an extremely dangerous place to say the least. Continued political instability and an inclination to warfare can propel gold prices to unseen and unimaginable heights appealing as a safe haven investment.

Conclusions

This article is not to discuss the pros and cons. of investing in gold. The objective was to articulate the three major factors that contribute to gold prices.

As demonstrated above, the current climate is screaming for higher gold prices, unless there is a major “U” turn in policy framework and geo-political agenda.

In my view, gold should deliver consistent price gains through the next decade or so. The truth is, the global economy never really recovered from the 2008 financial crisis. It was a major cover up process initiated by U.S.A. to save face and to maintain global economic supremacy.

The next round of economic shocks and the collapse of the global financial system are inevitable. 2017-2019 represent, a critical time for the global economy. Unprecedented debt levels signals a major economic catastrophe.

The economic calamity can be temporarily delayed but cannot be avoided. The unsustainable monetary policies will bear fruit sooner or later and hit the eco-system of the global economy like never seen before. A combination of geo-political and economic factors is setting the tone for Gold prices. Gold price recently broke upwards piercing its long term 200 day moving average which is an extremely bullish signal. A rise in price to $1350 Oz levels can cement the beginning of a LONG bull market.

With equities across the globe set to fall and an uncertain geo-political game, Gold will be one of the few commodities to attract positive cash flows.