Gold Price: Experts Underline Importance Of Decoupling From Dollar
from Gold Silver Worlds
Earlier this week, we provided a summary of the key investment insights from 6 top fund and money managers, including Jim Rickards and Ronald Stoeferle, during the recent Incrementum Advisory Board (www.incrementum.li).
Part of that discussion was the analysis of the recent action in the gold price. This article highlights the key thoughts in that respect.
Jim Rickards observes an important change in the gold market. Until recently, there was a fairly inverse relationship between USD and gold. If you look at the dollar index and gold, the low point of the dollar-index was exactly timed to the high point of gold. So there has been this inverse relationship between gold and the USD for the past three years. This changed during the past weeks.
Why is this breakdown happening? The answer is that today governments cannot have deflation. The structure of sovereign debt and central banking today is such that it cannot allow deflation to persist for a longer time. There is a long list of reasons why governments have to have inflation. Therefore, when you see deflation arising despite of central bankers wishes which it did in 1929 and it is doing today, central banks stop from nothing to turn it around. Investors start to buy gold during that environment. Why would anybody buy gold during a Deflation? The answer is, deflation is a pretty good leading indicator of inflation. In other words precisely because it has to turn, you buy gold even in the deflationary stage because you can see through it.
Gold was down in USD in 2014, but up in any other currency. This is not a gold story but a USD story, now the USD is the best performing currency of the world. Gold is also an interesting facet of the currency wars. If you think of gold as money gold can’t fight back.
Ronald Stoeferle, author of the In Gold We Trust reports and managing partner at Incrementum AG, reiterates the importance of gold’s strong performance during the rally in the USD. He also points out that the mainstream seemed to think that the gold price got completely trashed last year, although it was only a sideways trend. So there’s a major divergence between what the market says and what market participants say.
Euro gold, for instance, recently crossed the huge resistance at EUR 1,000. Research shows that gold works very well in deflation, but suffers in disinflation. That might be a sign that we are already in a deflationary spiral. Based on the increasingly strong disinflationary trend, we are convinced that there will be no rate hike this year in the US. Perhaps gold is already discounting that?
Heinz Blasnik, editor at Acting-Man.com and professional trader, adds to it that gold in EUR, GBP and Yen, are definitely in an uptrend. In USD, gold has made a few higher lows but it is not out of the woods, yet. “I have been thinking about who is buying gold at the moment and why? The only thing I can think of is that many money managers have sold during the correction and that new buyers with strong hands, deep pockets and solid long-term views have accumulated. Another reason might be that these people are looking forward and believe that there could be problems in the banking system, triggered for instance by the bursting of housing bubbles. That might be one of the reasons attracting lots of new buyers.”
But what to think of the recent breakdown of the gold price (in November 2014)? Zac Bharucha, former asset manager, explains that the gold price did not get down to 1,050, a very important support level. At the moment, gold is $1330/ oz, just below its 200d MA (which is still downward sloping). So the chart leads to some doubts: was the breakdown under 1200 a false break, or is their unfinished business in this bear market? The negative for gold is that the general commodity complex looks very shaky. However, as an alternative asset in a negative real interest rate environment, gold is a good investment. If stock markets roll over, market participants might switch into gold again after a long period of portfolio adjustment out of gold into risk assets, equities, high yield bonds and the like.
The transcript of the full conversation between these gentlemen is here: