Global Gold Outlook Report – 2nd Quarter

This article is based on the Outlook Report from Global Gold in Switzerland, written by managing director Claudio Grass. It provides a fundamental view on gold, not a short term price forecast. However, it takes into account the recent gold price decline and other major events. 

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The whopping outcry with the Cyprus bail-in plan made one thing clear: There is a deep misconception  among wide parts of the population about how banks function and what deposits actually are. Global Gold’s outlook report is aimed at clarifying this issue and explaining where the differences lie between banking institutions in comparison to providers of physical and unencumbered ownership of physical metals. The topics discussed in the paper are highly relevant after and include:

  • Debt vs. Ownership
  • Interest vs. Cost
  • Bank run vs. immediate delivery
  • Securities accounts and real depositories
  • Real vs. fake money

One of the interesting quotes related to savings and deposits:

When depositing funds with a bank your deposits become the bank’s assets. What the banks do is lend out the deposits to earn interest (they are only required to hold a fraction of the deposits as a reserve). A part of the interest which the banks earn is paid to the depositors. With regard to interest we should however mention that after accounting for taxes and consumer price inflation (not to mention asset price inflation), deposits have in most cases a negative return in real terms. Although the numbers on the bank statement get larger every year the amount of goods you can purchase with your money decreases year by year. So even if you are earning interest, deposits are not the best instrument to save your assets in the long run. Real depositories however concentrate on keeping your assets safe and accessible by you at all times.

About the recent decline in the gold price below the 1,400 level an ounce:

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This chart by Sprott Asset Management clearly shows the correlation between gold and the balance sheet. The recent decrease in the gold price is fully explained by the minor contraction of the balance sheet of the world’s largest central banks.


Although the gold price can fluctuate in USD terms, in the long run it’s a good store of value. In this connection we would like to mention the ABCD rule, which is simply invest in “Anything Bernanke Can’t Destroy”. Through its operations the FED can in essence destroy the value of all nominal assets. But even if the alleged intervention of the FED in gold markets is accurate, in the long run the value of gold in contrast to paper currencies cannot be destroyed by governments or central banks.

Outlook – scenario analysis

Scenario 1: Status quo (probability 80%)

Under our “status quo” scenario, governments will continue essentially as they have so far, delaying any real problem solving. They will continue to  “moderately” inflate currencies, bailout banks etc. Furthermore real economic growth rates will stay low.

Probability (estimate): 80%. We think that this scenario is the most likely for the coming months and years. Governments can’t and won’t tackle any real problems, they will follow their “muddle through” policy as they have done so far. Measures of financial repression like the capital controls and the confiscation taken place in Cyprus are likely to increase.

Impact on gold: As in recent years the current policies of governments positively impact gold prices. We think that the current “correction” is only a temporary phase in the long term upward trend.

Scenario 2: Back to “normal” (probability 10%)

In this scenario central banks worldwide abandon their current monetary policy and return to a more prudent approach. This is coupled with higher real economic growth in the world.

Probability (estimate): 10%. Due to the very high debt levels in western economies we hardly think that central banks can return to their normal monetary policy. The lack of any real growth impulses leads us to believe that this scenario is not a very realistic one for the foreseeable future. In the beginning of this year Japan decided to join in on the money printing “party” so it seems if anything that the central banks will intensify rather than stop their “efforts”.

Impact on gold: A “back to normal” scenario would probably impact gold prices negatively. Historically gold has tended to perform negatively when real short term interest rates have exceeded 3%.

Scenario 3: Crisis (probability 10%)

Crises can take on many different forms, such as a complete collapse of the financial and monetary system, a world war, civil unrest or many others.

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Probability (estimate): 10%. Political developments in most parts of the western world are worrying (for example in Southern Europe). We think that our current financial and monetary system is not sustainable. We don’t, however, see the tipping point on the horizon quite yet. Although we are following the news from the Korean Peninsula, North Africa and the Middle East we do not see the risk of a wide scale war for the time being.

Impact on gold: In a crisis scenario the price of gold would likely dramatically increase nominally. In real terms, gold should be an ideal medium to store value over the long term.

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