There a number of interesting developments in the world of gold, gold mining and finance going on, making it tough to focus on any one of them. So, here goes two cents’ worth on some topics of interest.
Gold pricesA $2,000 run up in the price of gold over the past quarter to its highest price in six years is an obvious place to start. If you are a gold miner you obviously like it, but it’s nice to know why it’s happening, because you would like to count on the increase to make future plans and feel surer and safer going forward.
As usual, determining causation is speculative, but the usual suspects always provide a good place to start.
The most obvious suspect is the current low interest rate environment. The traditional knock on holding gold is opportunity cost, i.e., the fact that gold is a “sterile asset” that pays no interest. Normally, gold’s only investment value is purely speculative.
Well, guess what? A number of major countries’ (France, Germany, the Netherlands, Switzerland, Japan and Spain) central banks are “paying” negative interest rates, a truly unprecedented situation. That means the lender pays the borrower to borrow money. If you think that’s nuts, you can take comfort in knowing that most of the world agrees with you.
Nonetheless, there is around $16 trillion in public debt, i.e., government bonds, that cost the buyers to hold them. Why hold these bonds? One, they are perceived as safe havens and, two, many banks are required to hold them by regulators. (You can actually get home mortgages with negative interest rates in Denmark, so you pay back less than you borrow! Go figure.)
Under the circumstances, you might as well hold gold, and more central banks are building up their gold reserves. China, for instance, has been a big buyer, but so have a diverse group of countries like Russia, Poland, Hungary, and other smaller counties. In the case of China and Russia, the flight to gold is no doubt fed by a desire to reduce their exposure to the U.S. dollar and U.S. Treasury policies. In the case of eastern European countries, they are more worried about their exposure to the policies of the European Union and European Central Bank.
Another consequence of the low interest rate environment is that cash is pouring into U.S. dollar denominated assets, particularly U.S. Treasury bonds which still pay interest. This is pushing our interest rates down, strengthening the dollar and creating nervous and volatile markets. Rising gold prices in the face of the resistance of a stronger dollar makes the higher price more remarkable.
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In addition to the current low cost of holding gold, there are the traditional “fear factors.” Trade tensions and troublemaker rogue states like Iran and North Korea are always background noise when gold prices go up. However, at the present time these are smaller issues. The Iranian navy is trying to disrupt the supply of oil by messing with shipping in the Straits of Hormuz, but nobody seems too worried about it. I’d be more afraid of the Cajun Navy – a bunch of good ol’ boys with duck boats, shotguns and high powered rifles – than the Iranian navy. And, the Norks are just being, well, Norks. The real issues are financial … such as tariff and trade issues.
Tariff and trade issues Trade issues, mainly involving China, are roiling financial markets and are complicated and won’t be resolved quickly – forget about a deal before the 2020 election like so many commentators think is going to happen. To repeat my favorite analogy, making trade deals is like breeding elephants: there is a lot of grunting, ranting, roaring, pushing and shoving; it all takes place at a high level; and it can take years to see if anything comes of it.
In real terms, we have threats of tariffs, currency devaluation in retaliation, threats of counter tariffs, promises to buy more US agricultural products, then cancelling purchases, etc. It goes on and on, and every push and shove produces headlines that create market panics or euphoria.
Everybody should just calm down. This is going to take a while. There are big issues at stake. There is bipartisan support in the U.S. for confronting Chinese currency manipulation, intellectual property theft, espionage, etc., and it shows no signs of weakening.
On the Chinese side, don’t expect the Chinese communist party leaders to change their entire system of government and give up their power and privilege for a bunch of foreign barbarians like you and me or vague principles like freedom and liberty.
The one interesting wild card in the China imbroglio for gold is the Hong Kong situation. This really shouldn’t have anything to do with trade, but no doubt will become an issue for NeverTrumpers. Briefly, the Hong Kongers are protesting an extradition law that would allow the Beijing government to nab people – Hong Kongers or foreign nationals – off the streets of Hong Kong and extradite them to China where they can be jailed and never heard from again. (China doesn’t have habeas corpus laws or any kind of due process).
What you have seen on TV are protests every weekend in Hong Kong over the proposed law and other non-democratic rules imposed by Beijing. However, what you haven’t seen is the massive amount of gold that Hong Kongers, who already hold more gold per capita than any other nation except Switzerland, are buying. The more the communists in Beijing ratchet up the pressure, the more gold they will buy. Even in mainland China, many times capital flight takes the form of carrying gold out of China to a safer place.