LAWRIE WILLIAMS: $1,400 a nonsensical gold price!

I have always regarded Singapore-based Grant Williams as one of the most astute writers on global economic matters and his roughly fortnightly Things that make you go hmm... (www.ttmygh.com) newsletter is always a ‘must-read’.  It brings together his own views, usually on some key aspect of the global economy, together with excerpts of articles and interviews with top analysts/economists/commentators on subjects he feels are pertinent to the current global economic picture.

In his latest 48-page TTMYGH newsletter - subtitled The Changing Of Lagarde - he focuses in his own commentary primarily, and very critically, on the forthcoming changes at the top of the European Commission hierarchy – notably the appointment of Christine Lagarde as head of the European Central Bank, when Mario Draghi’s reign comes to an end in November, and that of Ursula von der Leyen as the new EU President designate when Jean Claude Juncker steps down at the end of his term.  He sees both these appointments as ‘stitch-ups’ of the first degree with both appointees, in his opinion, totally unsuited for the positions they will be filling, but chosen purely because they are Eurocrats through and through and unlikely to rock the boat of what looks increasingly to be a dystopian political experiment. 

If there ever was a case for the U.K. pulling out of the EU (Brexit), this looks to be it now with the Eurozone economy heading for recession, led by a crash in the German manufacturing sector.  Germany has been the biggest beneficiary of the Euro currency, without which it would have undoubtedly seen its own currency appreciate in value sharply, thus making its exports less competitive on world markets.  But the sector is turning down dramatically at the moment.

As a bit of an aside, Williams makes the case for gold as something of a panacea for the global economic malaise, but with the promise of writing more about the yellow metal in future TTMYGHs.  He comments thus on the place of gold in the current extremely precarious global economic system:

“This is the reason why gold is finally stirring after seemingly stagnating for six long, dark years. It’s also why gold finally looks ready to break out of its range and head to a level more representative of all that we’ve spoken about today.” he writes.   

He continues: “As ridiculous as junk bonds with a negative yield is as a concept, a gold price of $1,400 is equally nonsensical given all that’s happening, and gold is shaping up to be the only currency that will stand apart from the competitive devaluation process – just as it was always destined to do.”

We would concur strongly and we await future TTMYGH newsletters with interest to see how Williams further expounds on his thesis.  His take on the situation, as always, will be extremely astute and thought-provoking and make for some very interesting reading.

In our own read on the situation, though, we would point out that although the gold price may be at, or around, $1,400 in U.S. dollar terms – and thus still around 26% below its dollar peak reached in 2011 – in many other currencies it is riding high – at, or close to, record levels in some of those countries where domestic currencies have been performing badly against the mighty dollar (perhaps around half the world’s sovereign nations).  In other words gold is already doing its job of wealth protection in many currencies around the globe and it may not be too long before it is achieving that aim in virtually all currencies – including the U.S. dollar if the recent dollar gold price surge continues, or if President Trump’s ever-continuing rhetoric regarding the uncompetitive strength of the U.S. dollar foreshadows a sharp cut in the dollar index.  But then the Donald has been preaching this for some time now without it having much, if any, effect on the greenback’s parity with other key currencies as long as the U.S. Fed seeks to maintain its independence of the Administration.

But, as we have pointed out here previously there appear to be a number of factors supporting the gold price – particularly important given it seems to have breached the psychological $1,400 level which, as Grant Williams implies in his comment, is still a nonsensically low price given the global debt situation and what is going on around the world geopolitically.  President Trump’s seeming obsession with U.S. trade imbalances and his ever-increasing resort to tariff and sanctions impositions is creating a degree of global economic instability which appears to be leading to increasing central bank gold accumulations which, in turn is helping raise gold’s profile as a protection against global economic stresses.  It also is bringing the yellow metal back as a mainstream investment asset class, particularly with interest rates around the world trending down to close to zero, or below, in many countries.

Zero or negative interest rates are hugely positive for the gold price, and it looks like the U.S. Fed may be heading in this direction too.  To cut rates while equities markets appear to be booming has to be a sign of a huge imbalance in economic thinking which doesn’t bode well for the markets long term. 

At the beginning of the year we were predicting a year-end gold price of $1,400 or above.  If current economic and political trends continue this target looks conservative and we could now be looking for gold to reach $1,500 in 2019 H2, failing some kind of major setback.  Indeed even this target might be considered conservative should one of several geopolitical flashpoints erupt – and then there are always Donald Rumsfeld’s ‘unknown unknowns’ (otherwise known as ‘black swans’) which could muddy the waters even further.  The stars are very definitely aligning for some big gold price advances in the months and years ahead!  We could be wrong, but things are looking good for gold at the moment.

 

15 Jul 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com