Image CC BY 4.0 courtesy of www.kremlin.ru
From Peter Reagan to Birch Gold Group
This week, Your News to Know covers the latest top news stories about gold and the economy in general. Stories include: Credit coins no more, how a $300 jump in gold could happen this fall and the pros and cons for money managers of owning gold.
Are we looking at a revival of the gold standard under an Asian Bretton-Woods?
This recent analysis of Russian and Chinese economic developments caught my eye. An in-depth review of the current state of the global financial system, combined with speculation about the ultimate goals of the latest deals between Russia and China, is taking us in uncomfortable directions.
As we know, sanctions have punished the West without stopping the Russian invasion of Ukraine. This is not debatable, it is simply a fact. For decades, the United States has seen diminishing returns from applying financial sanctions against hostile nations. Sanctions are a form of economic warfare that does not put soldiers’ lives at risk, cost a fraction of as much as military action, and are far more politically acceptable than armed conflict.
But they don’t work anymore. Instead of denying resources to our adversaries, we have made them more resourceful.
With this in mind, it is not surprising that Russia is preparing an Asian Bretton Woods-style financial pact with China. This effort, which appears to have been in the works for some time, is based on a few factors. Despite the ineffectiveness of Western sanctions, the world now knows that the US dollar’s role as a global reserve currency can be turned into a weapon against any nation at any time.
And if a nation can completely evade sanctions simply without using the US dollarhow long until other players in the financial system start to have ideas?
We don’t need to tell you what the establishment of the ruble and yuan as global reserve currencies would do to the West. That one is self-explanatory. But maybe it’s worth getting into the how of it all.
Their methods aren’t pretty, but you can’t argue that China is the most powerful economy in the world. Anyone wishing to argue this point in favor of the US or Germany need only reach their nearest piece of electronics. Although Russia doesn’t have much of an economy in the way, it has managed to form a junkie relationship with Europe, making much of NATO dependent on Russian energy exports.
No more elements are needed to usurp the greenback, but we know that gold will end up being even more important in this scheme. After all, Bretton Woods was not so much about economic strength or exports as it was about central bank gold holdings. The original agreement was quite simple: it guaranteed the convertibility of the currencies of any participating nation into US dollars and the convertibility of US dollars into gold. I meant Bretton Woods the values of all currencies were connected to gold.
These days, we are hearing that Russia has 12,000 tons of gold and China has 25,000 tons of gold. This is 4-5 times more than the current US gold reserve.
If we actually see this attempt to return the world’s #2 and #11 economies to a gold standard, it will be the economic equivalent of shooting a hostage. I expect we will see 1971 in reverse, with nations around the world scrambling to peg their currencies to gold once again, just to keep up in the new world of hard money.
Such a move would give it massive financial benefits for first movers and perform effectively all Obsolete Backless Fiat Coins. Gold would return to its historic role as money.
RBC: The price of gold does not depend solely on the crisis
Gold’s peculiar trading continues as the metal heads for its fifth consecutive monthly decline. Uncertainty is peaking, currencies are eroding. While everyone is worried about inflation or hyperinflation in the US dollar, it remains the main driver of the metal’s downside. Maybe the only one.
RBC Capital Markets’ Christopher Louney explains how the importance of US interest rate hikes should not be underestimated. For all the concerns, the reality is the same: right now, the US dollar is very strong. The intraday price of gold in this sense is not determined on the fundamentals of the dollar, but on its real or perceived strength. And neither can be denied these days.
Louney’s firm is currently working with two scenarios: more rate hikes and a strong US dollar where gold averages $1,773 this year, or safe-haven inflows that put gold at an average of $1,944 l ‘year. This would mean the metal falls to $1,663 in the first scenario and reaches $2,036 in the second. It’s also worth noting that RBC’s baseline scenario only involves a mild recession in the US
As we noted earlier, there are times when gold investors should want higher prices and there are times when they should demand lower prices. In this case, a persistently higher gold price will mean that something has gone wrong with the dollar, the US economy, the global economy, or all of that.
If gold stays around $1,700 or below, it will still be a bit higher than it was three years ago and not much down from its ATHs. Unfortunately, as strange as it may sound coming from Birch Gold, everyone seems to be betting on gold exploding within a year or two due to calamity. Some companies believe that calamity could be only months away, if not anywhere but in perception.
“This is the outlook where geopolitical risks come to the fore and become the driving principles of how the gold price discovery process is done, such as more safe-haven flows into ETFs and other gold assets. If the market is more concerned about geopolitical risk or the broader risk facing the economy, our high scenario is a fair bet,” Louney said of the high-end forecast.
Is gold really an inflation hedge and safe haven? Professional money managers step in
The Globe and Mail spoke with some Canadian money managers who have slightly different views on gold as a hedge or safe-haven asset. Is there a case against gold? Well, Robert Sneddon, founder, president and chief portfolio manager of CastleMoore Inc finds the metal a little disappointing. As he explains, it has not protected investors against the tech crash of 2000, the stock crash of 2008 or recent inflation.
Now, this point cannot be denied when we analyze gold Short term performance, the shorter the better, in these periods. But who claims that gold is a short-term investment?
Despite what some may think, gold is not bought in February to hedge against inflation in July. It can be, if the goal is to avoid disaster altogether. “It’s a merger hedge. In other words, if things go really bad, it hedges against that,” said Bill Harris, partner and portfolio manager at Avenue Investment Management Inc.
To enjoy or appreciate the performance of gold, only a long-term chart is required. “You have to take a 40-year view of your portfolio, which people hate to do,” Harris said.
Why do people “hate” taking a long-term view? Simple: short-term moves are much more exciting! Watching the price of an asset rise in real time tickles the reward centers of our brains. Pundits and bulls are too eager to tell you why history is irrelevant, that it only matters today. Speculators live in a feverish, eternal present, fixated on minute-by-minute price movements and trading frantically. Who has time to take a long-term view?
Only the cautious, the wise and the cool-headed who have seen speculative frenzies rise and fall keep their eyes above the day-to-day turmoil and seek their own long-term prosperity.
As favorable as gold looks on this chart, there is no need to go back that far. It is interesting that Sneddon chose 2008 as an example of gold ‘failing’ in its protective role. How many participants in the 2008 gold market were or are disappointed with their investment?
