Excellent analysis!
The long time it is taking for the U.S. Fed to implement QE3 - if it ever does - is leading to disillusionment among gold investors, but should it be having this effect?
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Posted: Friday , 17 Aug 2012
LONDON -
The markets are holding on for more quantitative easing (QE). This is what we keep hearing. Every day we hear reports of the gold price still maintaining its narrow ‘trading range' of the last month. In fact, since May it hasn't broken out of the $100 trading range.
Things don't seem to be getting any better, the markets are still demanding more action, banks are asking formore liquidity, bailouts still seem to be the only medicine for the PIIGS and the central banks are mulling about what to do next.
So, why hasn't gold gone through the roof? Is this not the time for it to shine? Especially when there are so many expectations of further QE, the markets are almost at a standstill waiting for the next announcement.
However QE's implementation, whether in the UK, US or even the EU is not a guarantee. This is despite various statements from governors, chairmen, presidents that they will do everything within their power; for most central bankers and economists these days this basically means printing money to buy bonds.
Gold as a hedge against inflation is an oft cited reason for gold bullion investment. The central bankers have already been on quite an inflation binge. But the inflation so many warned of when the printing presses were turned on has not transpired. In the US this week CPI is down to its lowest level since 2010 whilst in the UK and Eurozone it is up slightly but not enough to cause concern to markets.
Where is the inflation we were promised? Were central bankers right to be paranoid of deflation? Does no inflation mean no gold price extravaganza? Is that all we should worry about? Below we outline why, whatever the outcome of central bankers' moves the decision to invest in gold bullion will remain a beneficial one.
GOLD AND DEFLATION
Global growth has slowed quite dramatically since the onset of the Eurozone crisis, this has proved to have a deflationary impact on the markets.
Considering gold is considered the ultimate hedge against inflation many are asking if this means we are seeing the slow death of the gold bull market.
The World Gold Council believes that across all economic periods, whether inflationary or deflationary, gold has retained its purchasing power. Good news for gold bullion investment, but a report out this week suggests a deflationary period may be even more beneficial than an inflationary one.
Former Mineweb correspondent, Rhona O'Connell, citing Roy Jastram's The Golden Constant writes that during deflationary periods gold's value is at its most powerful:
In the United States there have been three recorded deflationary periods and gold increased its purchasing power in each of them, by between 44% (1929-1933) and 100% (1814-1830).
This suggests that to sell your gold investment ahead of deflationary events could prove counterproductive and leave with a high risk basket of investments due to the undermining of equities and low bond yields which is seen in such events.
IS IT JUST ABOUT QE?
Such comments do not mean we should hope for and expect the central banks to allow us to descend into a period of deflation. They fear this more than the sky falling on their heads.
But at the moment the markets are almost falling asleep waiting for further liquidity injections - they are clearly hungry for it. Even if central bankers are a little wary, we do expect to see easing of some form in the next few months.
In the short term we do seem to be facing deflation worries and a stagnant gold price. But in the long term it cannot be ignored that the markets have seen a huge injection of liquidity.
Whilst the central banks may have created the money, they have little control after they press the button.
Gold shows up monetary inflation far better, quicker indicator than consumer prices. So whilst gold has doubled alongside the doubling of central bank assets, consumer prices have not.
GOLDEN FUNDAMENTALS
Whether we are heading for further QE or deflation, these aren't the only factors which will drive the gold price.
The other factors which drive gold are very much still in place. The very same factors which were driving gold to record highs before the first round of QE was even thought of.
Interest rates remain historically low, with little indication of an increase. Whilst inflation may be officially low, real inflation rates indicate otherwise, showing savings in bank accounts are gradually being eroded away. Last month Bernanke and friends all committed to long-term low interest rates.
This week the World Gold Council reported that central bank purchases were at their highest in Q2 since 2009. Central banks are clearly losing faith in both the euro and the dollar, they are ahead of the game and setting up the barricades for when the full assault on the two currencies begin.
Whilst data from the US and the EU may appear to be slightly healthier than expected, fears remain about China, India and Brazil. The green shoots of the next financial growth phase seem to have withered, with many expecting China to be pushed to implement a round of stimulus. This in turn will increase gold demand from Chinese citizens terrified of inflation.
Whilst China and India may be a bit cool in gold purchases in the last quarter, demand from Europe, namely Germany has surprised everyone. I'm not sure why considering of all the currencies, the single currency union is the one which will create the biggest car crash of them all, affecting so many different economies and individuals. The Germans have seen a currency crisis before and they're insuring themselves pronto.
As we have said repeatedly on these pages, in times of crisis, individuals turn to gold. Whilst Syria is not to be acknowledged for any decent behaviour at present, the population has displayed the human tendency to turn to gold in times of crisis. This week Bloomberg reported President Assad had lifted restrictions on gold bullion imports, this comes at a time when it is becoming increasingly difficult for the country to interact with the outside world.
SHORT TERM, LONG TERM GOLD PRICE
The mainstream seems to think that economics and the gold price mirror one another like Tweedledum and Tweedledee. Unfortunately like life, it doesn't work like this. It takes time for one another to catch up. Hence the ‘great correction' we are witnessing, investors, the markets and inflation all need to look across the race lanes and see where everyone is.
Inflation, deflation, who knows, we need to step back, discard our magnifying glasses examining the brush strokes and look at the dark picture in front of us. Lots of things are going on, but they all play a role in the story; the economy is going to the dogs and gold has plenty further to run.
*Jan Skoyles is Head of Research at The Real Asset Company. Jan first became interested in precious metals and sound money when she met Ned Naylor-Leyland whilst working alongside him in the summer of 2010. Jan then went on to write her undergraduate dissertation on the use of precious metals in the monetary system. After graduating from Aston University Jan joined The Real Asset Co research desk. Her work and views are now featured on a range of sites including Kitco, GATA, lewrockwell.com and The Telegraph. She has appeared on news channels including Russia Today to discuss the gold price and gold investing. You can keep up with Jan's commentary by subscribing to the RSS feed Gold Investment News.
Source: Is disillusionment with gold investment justified? - GOLD ANALYSIS
