Where Are We Headed?
This weekly is on the early side and I am wary of what Friday brings, especially as the debt ceiling saga gives rise to further bond market volatility.
Back in the markets, the headlines that really grabbed our attention this week were those related to the seemingly inexorable rise in the price of gold.
Gold has gained more than 3% this week alone and 23% year-to-date. It’s trading above 1,900 dollars per ounce as we speak, and just touching a new all-time high. In fact, the performance of gold for sterling-based investors has been even stronger. In sterling terms, gold broke through to new all-time highs last year, and is currently scaling new heights again this week.
So, what drives gold and what are its attractions as an investable asset?
Firstly, and most obviously, although gold can be seen in some ways as a currency, unlike other forms of money, it cannot be printed or created at will. Gold is also traditionally seen as an inflation hedge.
However, our view is that gold does not necessarily require goods price inflation to perform well as an asset class. In fact, the more important driver for gold is rather the inflation of money, ie. expansion of the money supply.
Right now, governments around the world are supporting their plunging GDPs with massive spending packages, while central banks are working in coordination, simultaneously buying vast amounts of government debt and thereby in effect creating new money.
When that money eventually gets spent by government, it must either end up either in someone’s bank account somewhere, or as paper currency in someone’s pocket. And that is the very definition of the money supply - bank deposits plus currency in circulation.
So right now the world is seeing an expansion of the money supply in “spades”, so-to-speak. The global money supply is exploding. Under this so-called Modern Monetary Theory, gold could become the ‘safe asset’ of choice for investors in the future.
A fair question to ask would be “isn’t gold just expensive now”?
Interestingly, despite the rise in the price of gold per ounce, the total value of “above ground” (ie. mined) gold in the world relative to the total global money supply is still well below previous peaks.
In fact, over the last twenty years, the global money supply has actually increased much faster than the total value of the world’s gold.
So, gold does not look expensive relative to money itself, which could make one believe the current rally may have quite a way to go yet as gold comes out-of-the-closet, so to speak, as a safe asset of choice for investors.
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