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LAWRIE WILLIAMS: A disastrous week for the U.S. and maybe a positive one for gold

When one comes to reflect on the events of the third week in August this year, one may be forgiven for assuming that they represent a sea change in America’s global influence, and potentially for gold going forwards too.  We rate Canadian Economist and gold specialist, Martin Murenbeeld’s views highly as being among the most consistently realistic on the sector and draw heavily on his conclusions in his latest Gold Monitor newsletter for the content and views expressed in this article.

Overall he appears to be optimistic for gold going forwards.  He comments that gold seems to have recovered well from the recent ‘Flash Crash’, which took the price back, temporarily, by well over $100 from a confluence of the statements circulating at the end of last month’s FOMC meeting, together with the better than expected US employment report of August 6th.  The latter seems to have set up the big gold price crash in Asia over the subsequent weekend, but feels the immediately following gold price recovery may well suggest that the price lows seen then will prove to be the low points for the current year.

He goes on to comment that  despite the (almost certain) fact that the Fed will commence tapering its $120 billion monthly treasury and mortgage paper purchases before yearend (despite rising cases of the Delta variant), the gold investor should take some heart from the fact that gold is again holding near the $1800 level. (It closed at $1,780 in New York at the end of the week.)  He sees the Fed’s tapering likelihood to now be fully discounted by the markets.  However there does seem to be the largely unsaid possibility that the high U.S. coronavirus infection statistics and deaths currently being recorded (over 150,000 new infections and 1,000 deaths per day) could yet derail the putative U.S. economic recovery on which these Fed moves are dependent.  If this view proves to be correct then Murenbeeld feels that the $1780-1800 range could prove to be a durable base from which gold can launch its next leg upwards.

The other big recent event that could well impact the gold price, although it doesn’t seem to have done so far, has been the rapid withdrawal of the U.S. military from Afghanistan and the subsequent enormously quick take-over of political power by the Taliban, despite their forces being hugely outnumbered by the Afghan army.  This has been an absolute debacle for U.S. global influence, and for the Biden Presidency from which the latter may never fully recover.  True, the U.S. has managed, over the years, to shrug off the remarkably similar scenes of its almost identical withdrawal from Vietnam almost 50 years ago now.  But U.S. involvement in Vietnam was arguably a politically more unpopular conflict, domestically, than the slightly more limited Afghan intervention,  This latter was initiated in response to the 9/11 attacks on New York’s World Trade Center towers, and the knowledge that Afghanistan was sheltering the terrorist organisation responsible.

Whatever the U.S. domestic views about such militaristic interventions, the seemingly disastrous withdrawal from the Afghan war is a global signal that the U.S.’s much vaunted military strength and its high-tech equipment is far from invincible - even against the kind of rag tag army of the Taliban.  It serves to make U.S. allies rather less confident on any ongoing support (Taiwan immediately comes into question), and its prospective opponents (think China and Russia) much more aware of the superpower’s military vulnerabilities. 

As a result Murenbeeld comments that the world is arguably less stable today than it was a week ago, and US allies are yet more reticent to follow US leadership – despite Biden having replaced Trump as the country’s Commander in Chief.  Indeed domestically it will give former President Trump, and his supporters in the Republican Party, much more confidence with respect to the mid-term next year, and the 2024 Presidential. elections.  President Biden and the Democratic party will hope time is on their side by the time these elections take place and the American military’s humiliation is long forgotten!

Murenbeeld goes on to suggest that it is perhaps discouraging for gold that the dollar index did not suffer this week.  Indeed he notes that it may even have benefited from its safe-haven status. However, he feels that in years to come Central Banks might well decide that more of their reserves should be held in gold, if only because the global role of the US and US leadership are becoming more suspect.   There does seem to have been a tendency for Central Banks to add to their gold reserves in recent months, and if Murenbeeld is correct this tendency could well accelerate and spread following the Afghan debacle.

In theory gold thrives on instability, and the events of the past couple of weeks have indeed raised global uncertainty levels.   It is still too early for this all to transfer into elevated gold prices, but in conjunction with some other seemingly positive factors for gold, prospects for the yellow metal’s price to rise look good.  Not least among these is the continuing ever-increasing negativity of real interest rates as inflation takes hold.  While Fed chair Jerome Powell, and some other Central Bank heads, claim the rising interest rates are only transitory, there is continuing evidence that inflation is both higher than the Central Banks are claiming, and may well continue to stay high for longer.  Negative real interest rates are seen as a key positive indicator for gold which itself is a zero interest rate generating asset.

21 Aug 2021 | Categories: Gold, Dollar, US, FOMC

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