Gold has experienced some remarkable and unexpected turn of events so far this year and year-to-date it is significantly higher in four of the seven top currencies (the euro, British pound, Australian and Canadian dollars), and up respectably in two others (U.S. dollar and Japanese yen).
To date, from its recent lows hit in November last year, gold has risen by up to 13% against the USD, 18% against the pound, 30% against the euro and 32% against the yen. And, the rise against weaker emerging-market currencies has been even more significant.
The significant gains in gold prices demonstrate the value of gold as a hedge, not just against inflation, but against sudden currency devaluation and systemic financial and economic risks as well.
Since the beginning of the year, there have been a series of events that caused investors to reconsider their position on gold as a safe-haven investment. In particular I am referring to the action taken by the Swiss National Bank, as well as the action taken by the European Central Bank. But, in addition, banks around the world have cut rates to ridiculously low levels as the current currency war intensifies. Also, collapsing oil prices have money managers looking to other commodities such as precious metals.
The surprise move by the Swiss National Bank (SNB) which caused total havoc in the global currency markets was the catalyst to send the price of the yellow metal through $1280 an ounce in its biggest weekly gain in 17 months as investors look to gold as a safe haven in the face of all the recent volatility.
On January 15th, the SNB shook the European and worldwide banking systems by abandoning its long-held cap on its currency.
The move sent the euro and U.S. dollar dropping against the Swiss franc and boosted demand for gold as a safe haven.
Since September 6, 2011 the SNB has fulfilled its policy of maintaining currency values at a level of no more than 1.20 euro per Swiss franc.
The move sent the franc nearly 30% higher against the euro in chaotic trading. Coming a week before the European Central Bank is expected to unveil a bond-buying program to counter deflationary pressures, it fed speculation that this quantitative easing (QE) scheme will be so big that the SNB would have struggled to defend the cap.
SNB Chairman Thomas Jordan denied that the move amounted to a "panic reaction", saying the cap had been scrapped because it was unsustainable.
"If you decide to exit such a policy, you have to take the markets by surprise," Jordan said.
As it removed the upper limit on the currency, the SNB sought to discourage new flows into Swiss francs by pushing down its interest rate on some cash deposits held at the central bank by commercial banks and other financial institutions.
After taking the rate into negative territory last month for the first time since the 1970s, it cut another 0.5% to -0.755%.
"The values we currently see (on currency markets) point to a massive overvaluation of the franc," Jordan said. "They should come back down to more sustainable levels. Markets tend to overreact when confronted with such a surprise."
Following the announcement by the SNB the Swiss franc gained around 15% against the U.S. dollar, the Australian dollar and other currencies. Big drops were also experienced on the Swiss Stock Market, with the Swiss Market trading down well over 11%. Swiss banks and ATMs temporarily halted all transactions in euros to prevent wholesale flight from the rapidly falling euro. PostFinance, one of Switzerland's biggest banks for retail clients, temporarily stopped distributing euro bills.
Soon afterwards, the European Central Bank (ECB) announced its quantitative easy programme, by committing to purchase 60 billion euros of government debt and other assets every month until September of 2016 or until inflation gets closer to 2%. .
Investors' desire for precious metals increased after the ECB’s $1.3 trillion pledge drove gold to a five-month high and silver to the brink of a bull market.
At a time when the price of almost every other commodity is sinking, silver and gold are having their best start to a year in more than three decades. The ECB’s stimulus program sent the euro to an 11-year low against the dollar, pushed government bond yields lower and raised the appeal of alternatives to currencies that are being revalued.
More than $12 trillion in new money has been created since the global financial crisis by the major central banks in a broad attempt to bolster hobbled banking systems, ease debt service and revive a damaged global economy. However, it seems that the only real benefit of this money printing has been to make the financial elite richer at the expense of the middle class and the poor.
Last month, the Indian Reserve Bank Governor Raghuram Rajan cut his key interest rate for the first time in 20 months.
Last week, in another surprise move the Bank of Canada (BoC) cut its overnight rate to 0.75% from 1% in January. Policymakers saw downward pressure on headline inflation from lower energy prices while upward pressure could come from the depreciation of Canadian dollar.
The BoC also revised lower its growth and inflation outlook, suggesting further easing cannot be ruled out in coming months.
Singapore also unexpectedly eased monetary policy, sending the currency to the weakest since 2010 against the U.S. dollar as the country joined global central banks in shoring up growth amid dwindling inflation.
The move came after an unscheduled rate cut by India in January and was Singapore’s first unplanned monetary policy change since one in the aftermath of the Sept. 11, 2001 terrorist attacks in the U.S. The central bank last eased policy in October 2011.
Singapore becomes at least the ninth nation to ease policy this month, as officials from Europe to Canada and India take action to contend with escalating disinflation and faltering global growth.
Last week, the Danish Central Bank cut the deposit rate from -0.2% to -0.35%, and yet again, for the second time in one week, cut rates from -0.35% to -0.5%!
And, on Friday, the Central Bank of Russia cut its key interest rate to 15%, just one month after the surprised rate hike. In a statement the bank stated that the recent rate hike from 10.5% to 17.0% "resulted in stabilization of inflation and depreciation expectations to the extent the Bank of Russia expected." And, the surge in inflation driven by depreciation of the ruble was "time-limited" and would be contained by a "decrease in economic activity".
Earlier on Tuesday, the Reserve Bank of Australia cut interest rates to a record low, sending the Australian dollar to a six-year low against the U.S. dollar. And, it fell more than 2% against the yen.
Australia's central bank cut its cash rate by a quarter point to 2.25% in order to spur a sluggish economy and keep downward pressure on its currency.
Meanwhile, the Chinese yuan became one of the top five payment currencies in the world in November. According to the latest data from SWIFT, one of the largest international interbank transaction companies, the yuan jumped from seventh to fifth place, overtaking the Australian and Canadian dollars. With the yuan accounting for 2.17% of global payments, it is not far behind the Japanese yen, which has a 2.69% share.
Central banks around the world bought a net 461 tons of gold in 2014 – 13% higher than the previous year and the second-highest level since the collapse of the gold standard in 1971 -- as they continued to diversify their currency reserves following the financial crisis. They have added 1,800 tons to their holdings in the past six years.
Russia accounted for about one-third of central banks' gold purchases last year as the country spent more on the metal than at any time since the break-up of the Soviet Union amid escalating tensions with the west and a collapse in the value of the ruble.
Russia's central bank purchased 152 tons of gold worth $6.1 billion at today's prices -- an increase of 123% compared with the previous year -- in the first 11 months of 2014, according to GFMS estimates.
India overtook China as the world's biggest gold consumer in 2014 as global physical demand fell, an industry report showed on Thursday, forecasting that prices that have declined for the last two years would bottom out this year.
Chinese gold demand slid by more than a third last year to a four-year low of 866 tons, while the country's scrap gold supply rose 21% to an unprecedented 182 tons, the report by GFMS analysts at Thomson Reuters showed.
Slower economic growth and a crackdown on corruption helped knock Chinese jewellery demand to 608 tons, 33% below the previous year's "extraordinary" levels, it said. Physical bar demand fell 53% to 171 tons, a five-year low.
"We do expect an increase in Chinese demand this year. However, without a dramatic course of events we would not expect it to come close to matching the level in 2013," GFMS analyst Ross Strachan said.
Indian jewellery demand rose 14% last year to a record 690 tons, putting it back ahead of China as the world's number one jewellery manufacturer.
The drop in buying in China helped drive a 19% fall in global physical gold demand, with all areas declining except central bank buying, the report said. World jewellery demand fell 11%.
Nevertheless, so far this year the price gold has risen against all major currencies, including the US dollar, with the price above 200-day and 50-day moving averages in bullish formation. To date from its lows gold has risen by up to 13% against the USD, 18% against the pound, 30% against the euro, and 32% against the yen. And, the rise against weaker emerging-market currencies has been correspondingly greater.
The rising gold price is an early warning of future monetary and currency turmoil. And, as the major central banks around the world continue to print enormous amounts of money, an increase in the demand for physical gold can be expected.