By Michael Every of Rabobank
‘Golden Balls’. That was the name of a not-very-successful UK game show from 2007. It was also what the British used to call David Beckham, arguably the most talented footballer of his generation locally. He bestrode the world football stage like a colossus from Manchester United to Real Madrid to LA Galaxy. Everyone around the world knew him and loved him. And yet, Becks never won anything when playing where it really mattered most – internationally, for England. There were several times when his England team almost nearly kinda could shoulda woulda won something…but never did. All they ever had were flashes of brilliance from Golden Balls and a memory of when they were winners in the distant past
All of which seems appropriate, to me at least, given there is so much obsession with gold at the moment. We are now close to USD2,000 and there seems no stopping it. Will we get to USD3,000, as one major bank with a Beckham-esque name is claiming, or will we go to USD5,000, as a razor-sharp friend suggested to me yesterday? Either is possible given the current trend. And, if you buy gold, technically that is going to make you money.
And yet that money is still going to be priced in US DOLLARS – and that gives the whole game away. Like fans of the England football team, gold fans can dream of the distant past when gold was the centre of the global monetary system; but they can keep dreaming if they think those days are ever going to return. Gold may be an appreciating asset, but all the evidence suggests that it won’t be one that is of any direct relevance to day-to-day life, finance, and business. Your currency won’t be tied to it. You won’t get paid in it. You won’t spend in it or save in it (other than to the switch back to US Dollars). You won’t be doing deals in it or importing in it.
Yes, as the gold bugs rightly point out, there are spooky parallels between today’s trends and those of the 1930s. Uncertainty abounds. We have political polarisation and the collapse of the centre almost everywhere, albeit tapered by the welfare state for now (on which front, the Republicans have apparently agreed on the details of a new US1 trillion stimulus package).
We also have the international environment to match. Yesterday I shared the summary of global defense strategists that within three years US-China conflict is seen as “almost unavoidable”, while it is also “likely” within 12 months. Here’s an even better summary of the reality of the world as it stands today – Philippines’ President Duterte stating of the South China Sea that falls within their own national economic zone, according to international maritime law: “China is claiming it. We are claiming it. China has the arms. We do not have them. So, it’s as simple as that.” Other areas, even including the territory of EU members, are seeing a similar dynamic play out.
That is exactly the kind of zero-sum, might-is-right, mercantilist world that prevailed the last time we had a gold standard, and which is part of its architecture. As David Graeber’s “Debt: The First 5,000 Years” shows, during historical periods of global exogenous money (e.g., gold) we see an increase in inter-state violence to get that gold compared to periods of endogenous money. That said, once the war starts, the fiat money certainly kicks in too, as we all know.
The missing link, for all of the constant muttering about the US going back on gold, or China linking CNY to gold, or Russia doing something mysterious and Russian with gold, is that during the 1930s almost everyone went OFF gold to deal with the ruinous socio-economic problems they faced as a legacy of WW1 debts and then going back ON the gold standard with a consequent need for austerity. (Which, like violence, is part and parcel of a gold standard’s architecture.)
Look around you: does anyone look like they are ready to embrace austerity right now? Quite the opposite. That Beckham-seque US investment bank is now saying that the Federal Reserve’s balance sheet could soar to USD20 trillion ahead, or nearly 100% of GDP: we had said the same thing in our recent report on MMT, as that’s the only way to finance 8-9% fiscal deficits for years ahead; and indeed, we made that prediction years ago when describing the big picture trends now emerging – apart from a virus as the proximate trigger.
Indeed, some central banks are backing vast state spending as their government tries to prevent a depression; some are doing the same with their government talking about national security, rearmament, and bringing home supply chains; the ECB are doing it to save the planet; and the New York Fed, representing the rapacious Wall Street that drove globalisation, caused the global financial crisis, and necessarily cheers asset- and not wage-price inflation, now says on its website it is dedicated to eradicating structural inequality and to working towards a “more equitable economy and society for all”. None of the above are going to work with the strait-jacket of a gold standard; and nobody is about to give up monetary sovereignty to a shiny metal at a time when it is needed more than ever to retain physical sovereignty.
So you can buy gold because others are buying gold. Yet you can’t buy gold with the expectation that it is ever going to be anything other than something heavy you need to schlep.
Moreover, whether gold goes up or down **IN US DOLLARS** is ultimately a product of the real US interest rate. The Fed, who start a two-day meeting today, are obviously going to be at zero and expanding their balance sheet for years to either keep people in work, bring back jobs, build a better army, or a better society, or world. Yet that does not necessarily mean the Fed are going to succeed in hitting the one target they were supposed to be focused on in the market’s mind - inflation. Japan shows even a 100%+ central-bank balance sheet is no guarantee of any inflation at all. If the US were to slip into deflation, meaning positive real rates again unless the Fed goes negative, how will yield-free, no-end-use gold look?
In short, it’s pretty clear where the momentum is right now on gold, and on the USD (although as noted yesterday, not vs. many emerging markets, with Turkey’s TRY the latest to have a sudden wobble). Summer volatility is likely to amplify both. However, once one realises what the underlying global architecture --rotten as it is-- looks like and requires, then one sees that talk of a ‘golden future’, for all the fancy footwork, also has the intellectual gravity of David Beckham