On Tuesday, the World
Gold Council (WGC) released a new edition of Gold
Investor, its publication on gold demand trends. What can we learn from
the report?
Gold Investor is back after a long pause, with a new layout. The latest
issue contains a few interesting articles about gold in context of: Brexit,
pension funds, the Shanghai benchmark or negative interest rates. It also
includes a cover story about the former Governor of the Bank of England
Mervyn King’s economic views presented in his latest book The End of
Alchemy: Money, Banking and the Future of the Global Economy.
Let’s start with the publication entitled “Misguided policies and economic
risk”. We will cover the rest of the articles next week. King believes that
monetary policy has reached its limits:
“If you repeatedly bring down interest rates to try and persuade
people to spend today rather than tomorrow, it works for a while. But they
become increasingly resistant to being asked to spend their resources now
rather than save for the future. And the longer domestic spending is in
excess of potential output, the more you have to borrow from the rest of the
world to finance it. Eventually people wake up to the fact that this is
unsustainable and then you get a sharp adjustment downwards.”
In other words, the monetary policy can only buy some time for politicians
to conduct some structural reforms. Unfortunately, they have not undertaken
the necessary steps for eight years – and this is why economic growth has
slowed down. The longer we wait, the worse it can be.
“The risk is that we just muddle through with a prolonged period of
very low growth. The longer that goes on, the more output we will have lost
in the interim. And in the long run, it makes another crisis more likely
because, if everyone is relying on monetary policy and it isn’t the answer,
we won’t get back to a new equilibrium.”
King describes the current state of the global economy as “radical
uncertainty”. This is why he suggests adopting a pragmatic approach to
investment and including assets that are negatively correlated or
uncorrelated in an investors’ portfolio. It goes without saying gold may be a
smart choice, as the shiny metal shows a low or even statistically
insignificant correlation to other major asset classes.
“I am very struck by the fact that over many many years, central
banks, governments and individuals have always, despite the protestations of
economists, held some gold in their portfolio. Obviously, there is no high
running return, but when unexpected things happen, particularly when
governments rise and fall, then gold is a means of payment that everyone is
always prepared to accept. And I think that’s why even central banks have
always had a role in their portfolios for gold.”
The take-home message is that the WGC released a new issue of Gold
Investor. The cover story describes the views of Marvyn King, the former
Governor of Bank of England. He believes that monetary policy has reached its
limits. If he is right as he seems to be, it is good news for gold, as sluggish
economic growth will continue due to ineffective monetary policies and lack
of political reforms. In an environment of weak growth and reduced faith in
central banks, the yellow metal should shine.
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Disclaimer: Please note that the aim of the above
analysis is to discuss the likely long-term impact of the featured phenomenon
on the price of gold and this analysis does not indicate (nor does it aim to
do so) whether gold is likely to move higher or lower in the short- or medium
term. In order to determine the latter, many additional factors need to be
considered (i.e. sentiment, chart patterns, cycles, indicators, ratios,
self-similar patterns and more) and we are taking them into account (and
discussing the short- and medium-term outlook) in our trading alerts.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor
and Market
Overview Editor
Gold News Monitor
Gold
Trading Alerts
Gold Market Overview
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