Investors rush into gold as they realize that decade-long money printing is an irreversible process. It cannot be stopped. In the face of long-term currency debasement, gold is the obvious hedge.
Gold broke its all-time record, reaching 2000 $ an ounce on August 4th, helped by Goldman Sachs’ bullishness. The investment bank, which has recommended gold since March, now has a 2300 target. «Gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows», said a Goldman report. It also stressed that ‘real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge’ as a result of record US debt levels.
Over the last two years, the precious metal appreciated in all currencies: 68% in Dollars, 65% in Euros, 58% in Swiss francs, 65% in Pound sterling, 63% in Japanese yen. This means that gold didn’t just appreciate in dollar terms, but even in safe haven currencies like the Swiss Franc. All lost value when measured in gold. Why? Investors are realizing that money-printing policies, which lasted for more than a decade, are actually not reversible.
In other words, it is not possible to restore higher interest rates, nor shrink central bank balance sheets. Interest rates are stuck at near 0%, especially in the U.S. where the shadow banking system has reached a level that requires permanently cheap refinancing. There is no turning back from decade-long cheap credit strategies, and from the long-term devaluation of the dollar and other main currencies. The status of the Greenback as «reserve currency» is looking increasingly shaky. Suddenly, the world is rediscovering why gold has been considered «precious», as we’re slowly drifting away from total faith in fiat currencies.
A long-time Fed critic, Peter Schiff (CEO of Euro Pacific Capital) made this point very clearly on a show hosted by gold media Kitko: «When we went to zero rates, when we did QE, people initially thought it was temporary and we could normalize rates and shrink the Fed’s balance sheet. And I said from the beginning that was impossible, and I think the markets are now beginning to realize that I was right about that. And when they contemplate a future of endless money printing and 0% interest rates forever and multi-trillion dollar deficits funded by the Fed’s printing press, it’s starting to sink in, and they’re getting rid of their dollars and they’re buying gold.» The only reason that gold stopped at $ 1900 after the Great Recession, he added, was because people were convinced the Fed could unwind its policy.
The Fed did try to reverse course, but failed. In a recent article, I pointed to the fact that balance sheet reduction is tantamount to «monetary tightening»: central bank selling last year has led to a sharp sell-off in risk assets. As we all remember, the liquidity crisis was looming well before the Covid crisis. Markets became very bumpy from September 2018 until a year later, when Jerome Powell, the Fed Chairman, finally brought relief by announcing a return to Quantitative Easing (QE). The Fed quickly stopped tightening monetary conditions, due to the unbearable upward pressure on rates. After the Covid crisis broke, QE became unlimited. «If they couldn’t shrink the Fed balance sheet when it was 4,5 tn $, argues Peter Schiff, how are they going to shrink it when it’s 10 or 20 tn $?»
In Switzerland, the national bank gradually sold the majority of its gold reserves over the last two decades. Prior to the change in the Swiss constitution in 2000, the Swiss Franc was backed by a minimum amount of 40% gold. In 2014, the Swiss central bank strongly opposed a referendum that was going to ban it from selling current and future gold reserves, force it to repatriate foreign stored gold, and keep a minimum of 20% gold on its balance sheet. The SNB claimed that gold was «one of the most volatile and riskiest investments».
Major central banks have been entertaining an anti-gold doctrine since the 2008 crisis. Gold is indeed volatile but less than bonds and equities. At the end of June, the SNB held the equivalent of 56 bn CHF in gold, and more than 700 bn CHF in euro and dollar reserves (in addition to smaller yen and sterling reserves). Euro and dollar assets risk losing much more value than gold. By inflating its balance sheet with securities denominated in those currencies, the SNB has created itself a significant forex exposure.
Today, the rise of gold has to be seen as a referendum against the printing press and unredeemable sovereign debt. As the US national debt increased by 8 trillion between 2001 and 2010 to reach 12 trn, gold prices went from 250 to 1400 dollars. Between 2010 and 2020, US national debt doubled from 12 to 25 trillion. Gold also doubled in price from 1200 to above 2000. The exponential trend looks set to continue.
A sign of the times, State Street’s SPDR Gold Shares ETF (GLD) is now attracting more money than any other product in the 4600 bn $ U.S. ETF market, surpassing the world’s largest ETF, the SPDR S&P 500 ETF Trust (SPY). Ronald Stöferle, managing partner of Incrementum AG in Vaduz, considers that a gold price of 8900 $ by 2030 would be realistic in his most recent issue of the «In Gold We Trust»-Report, as the report clearly identifies the return of inflation – the one we escaped in the previous crisis.
In the medium term, the gold rally may occasionally take a few breaks because of a positive job report here, or other dollar-bullish news there, but the fundamental case is compelling and won’t be blown away at the slightest breeze.