Gold’s Catalyst Will Be A Loss Of Confidence In Paper Money

In his latest interview with Kitco, Jim Rickards shares his opinion about the 6 bearish arguments from Mr. Roubini leading gold to below 1,000 dollar an ounce. That’s a bold statement which requires some thorough analysis. Jim Rickards comments in detail on each point. In this article we summarize Mr. Rickards’ main thesis related to the gold outlook, and describe his view on the inflation / deflation argument which we consider of utmost importance right now.

The gold price in US dollars reached its peak at around $1,920 in September of 2011. It has been in a trading range between $1,550 and $1,800 for a year and a half. Recently, the gold price has broken its support. It is trading between $1,325 and $1,480.

The six bearish arguments from Mr. Roubini:

  1. Gold prices tend to spike when there are serious economic, financial, and geopolitical risks in the global economy. Currently the economic outlook is positive.
  2. Gold performs best when there is a risk of high inflation. Right now, there is only mild inflation.
  3. Gold does not provide any income whereas equities have dividends, bonds have coupons, and homes provide rents, gold is solely a play on capital appreciation.
  4. Gold prices rose sharply when real (inflation-adjusted) interest rates became increasingly negative after successive rounds of quantitative easing. The time to buy gold is when the real returns on cash and bonds are negative and falling.
  5. Highly indebted governments could sell large parts of their gold stocks to pay off their debts.
  6. A return to the gold standard is inevitable as hyperinflation ensues from central banks’ “debasement” of paper money.

For Jim Rickards, his general outlook on gold is bullish because of the consequences of “money printing.” He points out that it is not only the US Fed who is “printing money”, but all Western central banks (Bank of England, Bank of Japan, European Central Bank, US Fed) are doing it simultaneously. Because currency wars intercept with gold wars the currencies of the other countries in the world are getting stronger. Think of countries like Korea, Australia, Switzerland, etc. They are under enormous pressure to print as well to avoid that their currencies become too strong as it will hurt their exports.

With the whole world tied to the printing press, inflation is just a matter of time, says Mr. Rickards. A greater danger is a widespread collapse in confidence in paper money. That will be the single catalyst driving gold to unprecedented levels. Could it happen in the next 2 years? It could, but Mr. Rickards sees it happening on a 3 to 5 years horizon. When such an event occurs governments will switch to emergency measures (think executive orders). The gold price that is needed to reflect the extended monetary base is approximately $7,000.

Related to the inflation/deflation debate, Jim Rickards Agrees with the statement of Mr. Roubini that gold is performing best during inflation. But he adds to it that the risk of inflation is high right now. It is even worse. In Mr. Rickards’ view, the current metrics point to deflation. The US Fed is trying to offset the deflationary forces by “printing money.” The book currency wars describes the global economy as a big war between deflation and inflation which is taking place simulatenously. Right now the world is experiencing a natural deflation of some 3 to 4% as a result of the economic depression which started in 2008. That is offset by artificial inflation. The US Fed, for instance, has expended its balance sheet from $800 billion to $3 trillion between 2008 and today. The current deflationary trend is also reflected in a lower dollar gold price (which implies a stronger dollar meaning deflation). The Fed is desperately trying to fight deflation. They will continue to expand the balance sheet even if it needs to go to $5 trillion.

If inflation would not take place and deflation would prevail gold would thrive as well. In the 30’s, the longest period of deflation in history (26% price decrease) gold increased by 70% from $20 to $35. The US central bank raised the price of gold as they were desperately fighting deflation. They could do so again as setting a higher gold price would inflate prices across the board.

The only situation in which gold does not win is in dis-inflation, which is 0% inflation.

Click to listen to the full interview on Kitco.com.

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