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LAWRIE WILLIAMS: Could gold be the answer in a difficult 2016

Here are a couple of paragraphs that to me stood out in an investment letter I have had sight of from independent analyst Russell Napier of ­Electronic Research Interchange:

“If you had not noticed, 2016 has begun with gold and the USD rising simultaneously. This is different and important. This is very positive for gold and very bad for the world.

“The rise of both together may signal that we have just entered that period when this inert non-yielding substance is preferred to those assets that promise a yield but where the scale of future payments is subject to considerable doubt. Also positive for gold, the advent of deflation, following the failure of the easy reflationary solutions promised by non-elected central bankers, will enfranchise aggressive acts of reflation by our elected representatives. When the tough get going then the going will really get tough- at least if you’re an owner of capital.”

Napier has been preaching this scenario certainly since the unanticipated Chinese yuan devaluation of last August, which he saw as the implementation of the beginnings of a global deflationary spiral.  Quantitative Easing by central banks has been an abject failure in the attempt by central banks to promote a kind of controlled general inflation – the only things it seems to have managed to inflate have been stock market valuations and property prices, but general price inflation has not been apparent – at least according to government-generated statistics throughout the developed world.

2016 has started out with some hefty stock market downturns – how soon before property values follow suit? – while general price inflation – even at the very low levels targeted by the central banks - remains painfully absent.  Under this view the world could be in for a very difficult year ahead with gold perhaps a significant beneficiary.

On the geopolitical front we also look to be in for a particularly scary year – or perhaps several years.  Islamic State (Daesh) may lose territory in Iraq and Syria, but such a religiously fanatical movement is unlikely to be totally defeated and how one can fully protect major cities from atrocities promulgated in its name by its fanatical individual followers is difficult to contemplate.  The movement is still drawing in new followers from the global Sunni Muslim population, but the bigger worry perhaps is if the Daesh philosphy spreads to ther countries.  It is very much a fringe Sunni Muslim theology and Sunnis account for around 80% of Muslims worldwide - which means around 16% of the total world population.

Islamic State’s theological leaders’ interpretations of the Koran would take us back to a pre-mediaeval Sunni-followed Sharia law system where any non-believer is guilty of apostasy – particularly those from other Muslim sects – and subject to the death penalty.  There appears to be little or no room for compromise or dissension under this particular theology. What is perhaps even more worrying in this nuclear weapon day and age is that this theological doctrinal interpretation foretells the Sunni Islamic State Caliphate eventually being defeated but then, as a result, precipitating the apocalypse!

But while the Islamic State ongoing conflict is perhaps the most obvious immediate apparent danger facing the world, there are plenty of other already looming geo-political and geo-financial flashpoints out there some of which are almost certain to impact us in the year ahead, while there are undoubtedly others hiding in the wings which, at the moment remain complete unknowns.  As we pointed out in an earlier article the sheer numbers of 'black swan' events already seen this year does not bode well for the future of global stability.

Not least of possible threats is that of a potential stock market collapse.  The Chinese stock market, which admittedly appears to be more of a casino than most, has fallen over 40% from its peak and is still falling.  This has been dragging other Asian markets down with it and Western markets have not been immune either with key indices in North America and Europe all falling sharply last week.  While the rot seems to have been stabilised a little today in the West, the markets still look fragile so nervousness abounds.  We have already been seeing a return of some safe haven demand in the US, represented by some big purchases into the gold ETFs, reversing the recent trend as a result.

We are also seeing some bank analysts breaking ranks on the likely future for the gold price following on from its strong performance so far this year, despite the Fed rate hike.  Towards the end of last year virtually every bank analyst was predicting doom and gloom for gold with prices forecast to drop below $1,000 and perhaps below $900.  Some remain of this opinion – and we’re not saying they may not eventually prove to be correct, although we hope not – but UBS in particular has suggested investors should get out of equities and buy gold, while some of the biggest names in global investment also seem to be leaping onto the gold bandwagon again.  Perhaps the sentiment is turning at long last.

With both gold and gold equities there does seem to be more of a consensus now that if we haven’t yet reached the bottom, we are likely very close – indeed it may already be behind us.  But making such a prediction for gold does leave one something of a hostage to fortune!  As far as gold equities are concerned, given the rise in the dollar against the currencies of most producing nations the mines may actually be doing rather better than last year’s fall in the dollar gold price might suggest.  So while 2016 may be shaping up dubiously on many fronts perhaps gold may be the one to buck the trend (along with silver, which could do even better if gold does take off).

11 Jan 2016 | Categories: Gold

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