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LAWRIE WILLIAMS: ‘Gold will Zig when markets Zag’

I am indebted for the title quote to one in the depths of an article by Matthew Piepenburg on the website.  The article in which the quote appears is very relevant to our own way of thinking about the recent somewhat disappointing performance of the gold price.  It is titled ‘Why is gold not rising’, and Piepenburg examines gold’s recent price moves with a comment that he expects gold to move up to a price of well over $4,000 an ounce by the end of the current decade.  Over this ten year timescale we should not be surprised if gold rises to this kind of level, even though it may, by so doing, only serve to compensate for the decline in purchasing power of fiat currencies due to ongoing price inflation.

Piepenburg comes from a belief in the gold manipulation camp and, inasmuch as we reckon that all financial markets are prone to a degree of manipulation by those with the deepest pockets, he may have a point.  But we perhaps give lesser credence on the day to day associated pricing of paper gold – which tends to set the quoted dollar gold price.  This is probably responsible for the current gold price malaise, even though gold bullion is recognised as the perennial safe haven.  We see the fundamental inherent strengths in gold as eventually overcoming any manipulation elements in the pricing of the yellow metal.  The free market almost inevitably tends to win out in the end.

 The article goes on to suggest that this perhaps manipulated paper price of gold has become a fiction accepted as reality, which Piepenburg feels as not surprising in the current financial landscape (historically brought on by over-valued stocks, negative yielding bonds and central bankers allergic to transparency) which he sees as defying every measure of honest price discovery or basic capitalism.

He is somewhat dubious about the current seemingly accepted position that the high inflation levels we have been seeing recently are but ‘transitory.’- a term he describes as a central bank ‘myth’.  In his opinion the enormous debt levels run up by countries recently requires inflation as central bank policy to be encourage – probably surreptitiously.  The banks may raise interest rates but will need to keep inflation rising even faster if they are ever going to be able to manage these enormously high debt levels.  In short ‘non-transitory’ inflation at a higher level than interest rate rises becomes a policy of necessity rather than  something to be avoided.  Interest rate rises, as we have seen in the past, will almost certainly ultimately see equity markets crash – the zag to gold’s zig – while increasingly negative interest rates as inflation bites has to be yet another gold supportive element in the equation.

As Piepenburg puts it, - the gold detractors ‘will smirk and hug their bonds,’ reminding us all that gold is a yield-less relic  but all the time forgetting, or refusing to recognise, that the ‘zero yield’ of gold is infinitely preferable to negative yielding bonds.

Piepenburg concludes with the following comments:    In the end, gold’s primary role is acting as insurance for a global financial and currency system which is, in effect, already burning to the ground.  By just tracking monetary growth rates a realistic price target for gold based upon inevitable monetary expansion would suggest gold at well past $4,000 by the end of this decade.  That may or may not seem enough of a short term growth target for those chasing returns today and revelling in excessive equity and bitcoin prices, but investors should be reminded that even with Fed “support,” all bubbles eventually burst.

While it is perhaps impossible to predict accurately when such a conclusion might be reached, ongoing advice is to be prepared against such an eventuality.  We commented recently that it would probably be wise to put at least 10% - perhaps even more - of one’s portfolio in gold as a hedge against such an outcome.  We re-iterate this opinion again here and now!

27 Sep 2021 | Categories: Gold, Dollar, Bitcoin, FOMC, Switzerland

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