Gold: The Economic Equivalent To Hinge or Tinder
ROSS NORMAN – GOLD : The Economic Equivalent To Hinge or Tinder ...
A chum and I have this long running joke that when we go into our respective village pubs, as veteran gold dealers we are frequently confronted by friends/locals/strangers with a barage of questions about the gold price, even before we have taken a first sip of the golden nectar. The point being, we would argue that anecdotally, when they start to tell us where the market is going, then that surely that has to be prima facie evidence that the market has topped out. The barometer has not yet fallen, we are not there yet …
So what do we share as regards the WHO and the WHY of gold buying … which is a necessary precursor to understanding whether this rally still has legs to run … and what would genuinely signal a market topping out … ?
Firstly, one might recognise that the data tells us relatively little. The buying is in the more opaque quadrants of the market. It follows that "yes", there is much speculation and little empirical data to follow as regards the key buyers. The days of the Washington Accord where central bankers telegraphed their moves in advance is a generation ago ... official buyers are now nuanced and discrete and they don't leave a vapour trail indicating their direction of travel.
Gold’s rally above $5000 reflects a deep malaise in financial markets, albeit not reflected (yet) in equity market valuations - this is not just about geopolitical concerns, nor other uncertainties, but it reflects a sharp and fundamental decline in trust and confidence in a system. The gold price is not a market indicator but a voting machine. The tape might spark to news about the abduction of a political leader, insurrection in far away places, threats to friends over control over large pieces of ice but at its core its the same story … gold is recalibrating to reflect a world where trust is in decline and more importantly, debt is self-fuelling – and of course those two are linked too.
Debt in itself is not always a problem – firstly its a question of whether it is uncontrolled and feeding upon itself – self-fuelling, and secondly its a question whether we have the political will to pull out of the dive. The liberal West has a terrible record of voting out those that want to give us austerity – we will not take our medicine – and the East knows that. We are like junkies hooked on the latest fiscal stimulus. Knowing that, who would buy those lovely IOUs the West keeps trying to sell (gilts and treasuries) to allow us to continue living consistently beyond our means.
So this is gold performing its role not just as an alternative asset, nor a diversifier, but as an “asset of last resort” … a thing of value that is not someone else’s promise to pay. Nothing else fits the bill. That decline in trust is also reflected in bitcoin's decline, and its the analogue nature of gold which makes it appealing … a genuine hard asset.
But that does not fully explain the move in the other metals … if gold is being acquired as a financial lifeboat, silver and the platinum group metals are being hoarded as strategic metals that are economically essential … they represent the front line in a battle for economic hegemony between competing nations. We are witnessing globalisation in full reverse. The West is trying to re-shore production so commodities themselves become the pinch point and a bidding war is in place.
Retail buying has been blamed for the move ... but this would be like drinking the ocean through a straw. The physical pipelines are tiny in comparison to the global gold market ... physical stocks are small and rapidly sold out ... rising prices coupled with fixed credit lines to financephysical inventory means dealers can hold massively less metal, amplified by higher funding costs ... and then there;s the problem of actually being able to source smaller seniminations of gold such as coins ... its not all sunshine. Many physical merchants have empty shelves but with phones ringing off the hook, while they struggle to resupply as capacity for conversion from large bars to coins and small bars is very limited.
Additionnally, physical investors are skittish and after such massive price gains who wouldn't be prompted into profit-taking or getting stopped out. Dips are brief and bought into aggressively ... sentiment and conviction from Asian buyers and from central bankers have chased prices above what most westerners think is affordable or sensible now. The lifeboat has sailed.
Anyway … coming to the point … and this is the important bit … what would bring about an end to this epic rally ? … Suppose you are married to someone …. suppose they are unfaithful … and then they repent … when would you start to trust again ? That is sort of the dilemma facing allocation managers who regard the status quo as having let them down … declining trust in dollar assets, rising debt (and no political desire to address the real problem) and geopolitical heavy-handedness, raising questions about long-standing economic traditions and systems. I suppose, put that way, then gold has to be the economic equivalent of hinge or tinder … a desire for an alternative at the point where you no longer consider the status quo worth keeping.
Ross Norman
CEO
