What Happens With The Gold Price If Deflation Wins?
It’s hard to argue that high debt levels are deflationary. And with the current expansion based largely on debt, we can’t expect sustainably higher economic activity to be generated. So what happens if deflation wins? Even if we eventually get inflation, what happens to our gold investments if we first go through a deflationary bust?
Fundamentals for Gold Unchanged as Economic Uncertainty Rises
Although the mainstream financial media would have you believe otherwise, gold ETFs represent but one component of global demand. Nonetheless, the paper gold market, which also includes gold futures, remains highly influential in establishing the spot price and thus shaping public perception. Ultimately, the fundamentals will win out, and there is little reason to think that gold will not flourish when the consequences of burgeoning debt levels and currency debasement can no longer be kept at bay.
The Downturn in the Spot Gold Price
Grant Williams, chief investment strategist for Mauldin Economics’ Bull’s Eye Investor, recently published a piece in his weekly newsletter Things That Make You Go Hmmm. At its core, the article gives a different take on the recent downturn in gold markets.
Where Are Gold Prices Going?
In the short term, prices cannot be predicted with any real accuracy. But if one takes a longer view, there are factors that can and should be considered. We all know the arguments about inflation and quantitative easing, but let’s take a look at a more basic price driver: the supply of physical gold.
Deviation Between Gold And Money Supply Presents Rare Opportunity
Across the globe, fiat currencies are being printed with wild abandonment as debt-addicted governments try to inflate their economies out of the ongoing crisis. In the United States, the Federal Reserve has tried it all, employing numerous asset-purchasing programs that have yet to spur any sort of meaningful recovery in the “real” economy.
New Chinese Exchange-Traded Products Poised to Boost Gold Demand
The announcement of 2 new gold funds represents the latest in a steady stream of bullish signals to emerge from China lately. Still, it is important to recognize that physical bullion will continue to drive the international gold market due to the fact that ETF holdings represent just 1% of the entire 175,000 tonnes of the above-ground gold stock.
Gold: The Bull Within the Bear
Don’t be fooled by what happened in the futures market. The retreat in the gold price is a buying opportunity for physical metal. And those who do so will be in strong company. The bottom line for me can be summed up by Zhang Bingnan, secretary-general of the China Gold Association: “The dumping recently of holdings in gold exchange-traded products by overseas investors may not prove to be a wise move.”
Total Public Debt Now Eclipses GDP In The US
As one can see in the chart, total public debt in the United States recently crossed the proverbial Rubicon and now equals 104.95% of GDP. Though some would argue that a healthy dose of debt is necessary to foster economic growth, the US’s unsustainable public debt exceeds the same debt measures of crisis-stricken Cyprus and fragile Spain, where public debt as a percentage of GDP have been most recently estimated at 85.8% and 84.2%, respectively.
The Secret’s Out: Now Is the Time for International Diversification
For the Western debt-addicted countries, years of profligate spending have more or less sealed their economic fates. Faced with economic uncertainty, governments will search for new ways to plunder the productive members of society. These may include capital controls, more onerous regulations, or wealth confiscation, either explicitly or by way of the printing press. Amid all of the doom and gloom, there are still opportunities to be seized.
Gold Continues to Move from West to East: Is Yours?
It’s no secret that demand for gold has always been strong in the East. But since gold’s mid-April correction, the move from Western economies to Eastern ones has picked up steam. Part of the reason is that Western governments own more gold than their Eastern counterparts, especially as a percent of total reserves. But the Eastern world is also seeing more inflation and is more wary of political promises and assurances.
Chinese Gold Rush Underway
The chart depicts the explosion in Chinese gold imports from Hong Kong since January 2012, during which China imported an astonishing 1,206 tonnes of gold – 20% more than the nation’s latest official gold holdings of 1,054 tonnes. In the first quarter of 2013 alone, China imported 372 tonnes from Hong Kong, or nearly what was imported through the entire first half of 2012.
Three Current Themes Precious Metals Investors Need to Consider
1. The Expansion of Quantitative Easing in the Developed World. 2. Currency Wars. 3. Precious Metals On Sale.
Gold Is Money: Central Bank Actions Send Investors a Clear Message
Germany recently announced its plan to bring home part of its massive gold reserves. While Germany’s announcement is no longer front-page news, it is important to consider the reasons behind this move, and the message being sent to investors by central banks around the globe – gold is money. So fasten your seatbelt, this around-the-world tour is about to begin.
Higher Interest Rates: No Longer a Death Sentence for Gold
Conventional wisdom suggests that higher rates are bad news for gold. However, as detailed in a recent special report by the World Gold Council, an environment of rising rates is not necessarily a death sentence for the yellow metal. In fact, excluding the high real-rate environment of the late 1970s and the early 1980s, US real rates have actually exerted little influence on gold prices.
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