The great gold rally continues, it is a victory lap for gold bugs and those advocating a system of sound money, which supports a store of wealth and sustainable development. Since time immemorial an ounce of gold has always been able to buy a fine suit.
Precious metals, particularly gold and platinum is often portrayed as a barbaric relic of the past, but the recent gold rally underscores gold as a prime haven asset that protects wealth in times of uncertainties.
The recent COVID-19 pandemic, which is already showing signs of a second wave, is the greatest modern calamity of our time. “The COVID-19 pandemic is a global health crisis without precedent in living memory. It has triggered the most severe economic recession in nearly a century and is causing enormous damage to people’s health, jobs, and well-being,” wrote the OECD in its latest economic outlook. What’s more, the central bank’s response to the pandemic has been the ramping up of quantitative easing QE, which is trillions of dollars of asset purchases, to keep the multiple asset bubbles inflated.
The cost of QE to infinity is a currency debasement and a gold rally
Back in January 15, 2019, I wrote “the ultimate haven asset, gold could take a moon shot,” in a piece entitled, Fed Impotence. The gist of the piece was that monetary tightening rate hikes and the Fed reducing its balance sheet assets purchases, also known as quantitative tightening, would not play out, despite the consensus view that it would, because the economic recovery narrative was wishful thinking. I argued the contrarian view that we would see rate cuts and possibly more QE going forward because the economic fundamentals would not support monetary tightening, which would ultimately be bullish for gold rally going forward.
QE infinity and near-zero interest rate policy ZIRP implemented during the 2008 financial crisis and again in the 2020 post-pandemic great lockdown is debasing the central bank’s fiat currency and giving rise to the great gold rally
Think about it, if central bankers are creating currency at will and saving rates are so low, then precious metals are looking like a safer bet against currency debasement, which is a worst-case scenario that could lead to a Weimar Republic hyperinflation. When investors start to perceive cash as trash this will fuel a precious metal, gold rally
In the most recent currency crisis where people feared the Hong Kong dollar deppeg to the USD people were queuing outside money-changers to exchange their local currency into US dollars. But what if, in future monetary crisis people start wanting gold rather than US dollars.
Gold is up 27.71% on the year, against USD at the time of my writing this piece. But the USD continues to be the best performing fiat currency to date. Moreover, its reserve currency status shows no signs of fading to date.
I wrote in a piece entitled, “Great Gold Rally” dated August 18, 2019,
“I believe that we are in the preliminary stage of the Fed’s rate-cutting cycle, which will be the shortest cycle ever bearing in mind that with the Fed fund rates at 2.25% it won’t take long to get to zero.” So with the US dollar depreciating against gold, with deposit accounts paying little or no interest, with QE infinity, which leads to currency debasement and with the 10-year treasury yields falling below 1% what happens when investors switch from US dollars and US dollar assets to gold on mass?
All the stars could be aligned for a long term gold rally, bearing in mind unprecedented monetary easing makes gold a good haven bet
Moreover, the post-pandemic V_shaped economic recovery is also proving elusive. What comes after the post great lock-downs is not pent up demand but pent up aggravation, people are on edge. The ingredients for a civil uprising are all present, massive income wealth inequality, aided and abetted by central bank policy, great depression unemployment, and a disenfranchised alienated youth in search of a cause. Today it is BLM and tomorrow it will be something else. But the worse riots are hunger riots. When Marie Antoinette said let them eat cake it led to the French revolution where the people overthrew the monarchy and took control of the government. So what could come next in this new abnormal period is the people’s QE, Modern Monetary Theory (MMT or UBI) administered during a second pandemic wave of more lock-downs and curfews.
The sheeple will willingly comply, they will lick the hand that feeds them, locking themselves into their cages and plugging into the FANG digital mind matrix to console themselves with the boredom of “the new normal” of mass incarceration.
But MMT could also be the last straw that breaks the camel’s back for this massive social experiment will not be financed by investors but instead by massive central bank money printing. Can you picture sovereign investors lining up to buy government bonds, an investment where the government pays its people to remain idle, producing nothing?
MMT could contribute to the final stage of the debasement of fiat currency leading to a Weimar Republic hyperinflation and a dash for tangible assets, put simply a great gold rally
But the central bank will not willingly surrender their fiat currency empire to gold without a fight, the great gold rally will be monkey hammered along the way. The ongoing gold fixing will continue through the paper derivatives market, the central bank can create as much currency as they require to throw sell contracts in the derivatives market, thereby torpedoing the gold price to whatever level they wish. Until we are ruled by fiat the gold rally will always be on the central bank’s tight lead yanked in when it threatens the status quo
Meanwhile, the monthly technical indicators are suggesting that the long term gold rally is intact with twelve technical indicators and 6 moving average periods ranging from 5, 10,20, 50, 100, and 200 days all point to buy.