For gold, the month of June was a phenomenal month with an increase that makes it a particularly high-performing investment. Obviously it is always nice to see part of a portfolio rise by more than 10 percent in a month. Why the good score?
On May 30th, gold was priced at $ 1275 per troy ounce. On June 30th it had risen to 1412 dollars. An increase of $ 137 per ounce or 10.74 percent. In short, it was a golden month for the most precious of metals. That is really good when one has investments in gold, but it is also important to investigate why this happens.
What are the structural reasons that seem to have been developing for a long time? What are the catalysts that seem to have removed the threshold for investing and turned a stable rise into a sharp break-out in a short period of time? And could they possibly give us an indication of what the future could bring?
The Dollar Is Not Worth Gold
A large part of the world is politically upset with the United States. After sanctions against China, India, Mexico and threats to the European Union, the market seems to get the idea that the world could be better off without the hegemony of the US and the dollar as a World Reserve Currency.
The title of world reserve currency gives privileges but also obligations, and it’s those obligations that the US doesn’t seem to have been taking serious for a long time. The US was the largest creditor nation in the world. Now, with a national debt of almost 22.5 trillion dollars, it is nation with the largest outstanding debt in history.
This accelerating debt build-up and unwillingness to implement policies to bring it under control, has not only given countries with large reserves in dollars such as China and Russia a political power. It also encouraged them to trade in dollar reserves for gold. In 2018, dollars were exchanged at record number for the yellow precious metal with 2019 set to top 2018 with record-breaking purchases.
The Economy Is Under Pressure
Macro / economic figures seem to cautiously indicate that the longest but also the weakest economic expansion in history is coming to an end. Unemployment rates are rising, companies are indicating a slowing down of growth and even the housing market is at a downturn.
The European Central Bank (ECB) has not raised interest rates above zero percent since 2012 and the still unreal phenomenon of Negative Interest Rate Policy (NIRP) has been implemented in the EU since 2014. This and other indicators seem to indicate a period of limited growth or contraction. And just like during the 2009 recession, gold is an attractive safe haven.
Inflation As The Only Objective
If we believe the financial pundits, deflation is the biggest concern of central banks. The self-proclaimed mandate of 'combating inflation' by central banks has changed considerably in recent decades.
Where in the past there was concern that the money supply did not become too large and inflation was limited to a maximum of 2 percent, the 2 percent appears to have become the norm and now even the minimum by which the value of money must decline.
That policy was implemented, among other things, because, despite Quantitative easing and NIRP, official figures show that inflation has been very low for years. Whether these official figures are also correct is always a point of discussion because only a limited number of indicators are included in the calculation of those figures.
Figures generated by Statistics Netherlands CBS show that we pay considerably more than the inflation figures show. In a previous column I wrote briefly about the threat of stagflation. Given the objectives of the Federal Reserve and the ECB, this extremely dangerous combination of low economic growth or contraction and high inflation is a realistic scenario that no currency can cope with.
Why The Enormous Rise?
That all of the above has an effect on the behaviour of investors, who seek the safe haven of gold in search of protection, in order to protect purchasing power, seems logical. Diversifying part of your investment portfolio into precious metals in many cases yields a higher return in both the short and longer term than a portfolio without exposure to precious metals.
The exact reason for the rise in gold however, is speculation. It is most likely a combination of the aforementioned where, for example, the rising tensions between the US and Iran are the catalyst. Where we can go next?