Goldman Sachs has been predicting the demise of gold for the past few
years. Back in July of 2015, Jeff Currie (Global Head of Commodities Research
at the investment firm) went on record predicting the price of the yellow
metal would fall below $1,000 per ounce by the start of 2016. However, that
prediction failed to materialize; despite the fact that gold was already
below $1,100 at the time he made the call.
Nevertheless, being wrong on the direction of gold last year did not
prevent him from once again urging investors to short the commodity in
February of this year; claiming it would fall to $1,000 per ounce within 12
months. His rationale for anticipating the price decline is that gold is
primarily a "safe haven" asset in times of economic and market
turmoil and that the U.S. faced very little recession risk -- so there is no
reason for investors to seek the shelter of gold.
However, Goldman Sachs, which is a bastion of Keynesian apologists--like
most on Wall Street, fails to grasp what really drives the price of
gold...and what has caused it to surge 18% so far in 2016.
Gold is not merely a "safe haven" asset; it is rather the best
form of money know to humankind because of its scarcity and
indestructibility. Financial houses hate gold because it tends to do best
when the securities they sell head south. And governments hate gold because
it best reveals the persistent destruction of the purchasing power of the
middle class through central bank debt monetization.
The major rationale Wall Street has used for years to eschew the metal is
that it pays no interest. After all, why own an asset that pays you nothing
if you can safely earn money on bank deposits and short-term sovereign debt?
But now this is no longer true. With negative interest rates on sovereign
debt and near-zero percent customer deposit rates now the norm, there are no
lost opportunity costs for owning gold.
More importantly, with $7 trillion (30%) worth of the developed world's
sovereign debt trading with a negative yield, you don't even need there to be
any inflation to cause real yields to become negative. Inflation has
traditionally been great for gold because it is a necessary ingredient to
push positive nominal rates down into negative territory. And, of course,
when your real return on cash is negative, investors flock to a commodity
that has a long history of retaining its purchasing power. What Goldman fails
to recognize is that since central banks have already pushed rates into the
basement, inflation need not be present to make real interest rates negative.
Therefore, the argument against gold has completely flip-flopped. Now
investors realize the perceived "safety" of holding sovereign debt
is no longer there since you are guaranteed to lose money on your principal
when holding it to maturity?
What's worse is that central bankers are moving further into unchartered
territory in pursuit of their inflation targets. ECB head, Mario Draghi,
recently increased his QE level to 80 billion euros per month, from 60
billion, and is now buying corporate debt to achieve a sustainable degree of
inflation. In fact, central banks around the world have vowed to do
"whatever it takes" to reach a 2% inflation target. Hence,
investors will soon have to subtract 2%--at a minimum -- from the already
negative yields on sovereign debt and zero offering on money market funds to
calculate their real return.
Gold is surging in this environment because citizens across the globe are
facing a huge loss in the real purchasing power of their savings.
In this new Keynesian dystopia, growth and inflation are deemed as one and
the same. Their game plan for success is simple: print money to create
inflation. This will boost asset prices and lower borrowing costs, which
will, in turn, lead to more debt creation. And more debt outstanding will
eventually -- according to these Keynesians--boost aggregate demand and cause
economic growth.
But the most pernicious part of being an addict is that it takes more and
more of the substance to achieve the desired result. Global economies have
become a bunch of debt addicts and governments are finding it necessary to
constantly lower borrowing costs in order to force more loans onto the debt-disabled
public and private sectors.
Mr. Currie and Goldman Sachs fail to understand that negative nominal
rates coupled with rising inflation expectations are the rocket fuel for
gold--especially since central banks are trapped in this vortex of persistently
reducing the value of their currencies vis a vis their trading partners. Even
our Federal Reserve found it necessary to renege on its plan to raise rates
four times this year after the markets fell apart in January.
But from this folly there is no end. The intervention of central banks in
the capital markets has become so extreme that they are now incapable of
selling their securities and fighting inflation without sending equities and
bond prices crashing. In effect, the inevitable binary outcomes have now
become intractable inflation or depression. And this is the real reason why
the bull market in precious metals has just begun.
