29-Sep (Incrementum) — Gold is back! With the strongest quarterly
performance in 30 years, the precious metal in Q1 2016 emerged from the bear
market that had been in force since 2013. A decisive factor in this comeback
is growing uncertainty over the recovery of the post-Lehman economy. After
years of administering high doses of monetary painkillers, will the Fed
succeed in discontinuing the practice? Or is the entire therapy about to be
fundamentally challenged?
Generating growth and inflation remains the imperative of monetary policy.
The systematic credit expansion required for this just doesn’t want to get
going. Even the ECB, which initially acted with restraint after the financial
crisis, is nowadays stuck in a perennial loop of monetary improvisation and
stimulus. General uncertainty has now increased even further after the
surprise outcome of the Brexit referendum.
After years of pursuing low interest rate policies, central banks have
maneuvered themselves into a lose-lose situation: Both continuing and ending
the low interest rate regime harbors considerable risks. In an attempt to
finally achieve the desired boost to growth, a monetary Rubicon has been
crossed in several currency areas with the imposition of negative interest
rates. Gold is increasingly attractive in this environment. It used to be
said that gold doesn’t pay interest, now it can be said that it doesn’t cost
interest.
As a last resort, even the radical measure of helicopter money is
considered these days. As the flood of liquidity has hitherto primarily triggered
asset price inflation, newly created money is now supposed to be injected
into the economy by circumventing the banking system in order to boost
aggregate demand. It seems realistic to expect that such a windfall would
indeed ignite the much-coveted price inflation. Whether it will be possible
to put the genie back into the bottle once it has escaped is a different
question.
An exit from the Fed’s monetary emergency programs has been announced for
years in the US. This, together with the perception that the economy was
recovering, led to a strengthening US dollar in recent years. Commodities and
gold weakened as a result. So far, the actual extent of the normalization of
monetary policy consists of the discontinuation of QE 3 and a single rate hike
by 25 bps.
The US economic expansion appears to have run its course already. Should
the rate hike cycle that has been initiated fail, a significant loss of
confidence in the central bank’s policies and with it the USD appears likely.
This would go hand in hand with rising commodity prices and a return
of inflation and would represent a “perfect storm” for gold.
We believe the time for investing in inflation-sensitive assets
has come. Apart from gold, silver and mining stocks offer very
interesting opportunities. After several years of drastic adjustments, it is
likely that mining shares will once again exhibit strong gold price leverage.
We believe that the events of the past year are validating our
views and are maintaining our gold price target of USD 2,300 by June 2018.
PG View: We always eagerly await each annual edition of
the In Gold We Trust report. As usual, it is a comprehensive and enlightening
treatise on the fundamental factors impacting the gold market, revealing the
importance of having some of the yellow metal as part of a well diversified
portfolio.
