Politics of Gold

Posted By Darren Winters on Nov 23, 2021


Politics of Gold

The politics of gold price weighs more on the current value of the shiny yellow precious metal than the economic and financial fundamentals.

In an article it was written that the market is essentially bets on the Fed and CCP policy.

Markets have essentially become a political tool to influence public sentiment. When the Federal Reserve, the world’s central bank by default, wants to foster a feel-good sentiment it buys assets in the market, which spurs on a stock bull market. 

Moreover, when stocks are rising it facilitates business investment, and household wealth increases along with spending as those with assets feel wealthier. 

Investors and traders alike have come to realize and accept that it is the Fed’s monetary easing policy, which is the main driver of asset prices since the financial crisis of 2008.

Politics of Gold

As we progress into a new decade, the 20s, public deficits of advanced economies are ballooning, and a new economic system, State Capitalism appears to be emerging.

The politics of gold price will be even more prominent in a state capitalism system where public spending and the monetizing of government debt are likely to accelerate.

In other words, we believe the trajectory of US national debt as it spirals to nearly a record 29T USD, according to the US Debt Clock, is likely to go much higher shortly.

If that call is correct, then the supply of US treasuries hitting the sovereign debt market will grow as the US government finances its trillion-dollar expansionary deficit program by monetizing the debt.

Now, here is where the politics of gold comes into focus.

The two safe-haven assets in a risk-off sentiment are gold and prime collateral, such as US treasuries.

So, if the gold price appreciates faster than real treasury yields, and the USD depreciates overtime against other currencies, then there is no investment logic to buy US treasuries. 

Think about it. Why would an investor buy treasuries, which is a promise to pay back the amount invested plus yields, if real yields are negative, and the USD depreciates by saying 10%?

In a scenario of a sinking USD and negative treasury yields, gold would be a better safe-haven asset.

That would be wrongly assuming that the politics of gold doesn’t factor into the equation

So, in a backdrop of Fed tapering, reducing its monthly purchases of US treasuries by 10B USD per month, and the US government’s trillion-dollar infrastructure program, the gold price will continue to be suppressed. 

Future gold price is likely to be manipulated to the downside. 

The Fed can indirectly manipulate gold prices through interest rate policy, yield targeting, and quantitative easing. The dumping of gold derivatives is another way the Fed can manipulate gold prices to the downside. 

For those doubters, here are just a few examples of the politics of gold price, or better said, gold rigging at play.

Three J.P. Morgan precious metals traders charged as criminal probe continues

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