Is The World Going To See A Global Monetary Reset With QE Used To Purchase Gold?
On the heels of the recent post-election market turmoil, is the world going to see a global monetary reset with QE used to purchase gold?
(King World News) Paul Brodsky, Macro Allocation Inc. — Gold
To “take a flier” against consensus with long duration treasuries also suggests taking a flier with gold. Treasuries and gold are normally inversely correlated. In a typical economic cycle, declining treasury yields imply dollar strength, which in turn, suggests gold weakness. We argue that current conditions do not imply a normal economic cycle and that, in the current environment, long treasury positions may be best hedged – and potentially enhanced – with a long gold position. (For fixed income investors, this is reminiscent of hedging long MBS positions with long Treasury positions.)…
In the current environment (imminent balance sheet recession), gold is the most convex asset we know. Gold hedges financial asset values by hedging the currency in which they are denominated. An increase in goods and service inflation reduces the purchasing power value of the currency while an increase in goods and service deflation reduces the supply of goods and services. The former is better understood than the latter because the frequency of inflation is so much greater. At the end of the day, gold is a hedge against balance sheet de-leveraging, whether it comes from a significant increase in the quantity of money or a significant decrease in the value of liabilities. A decrease in the value of treasury bonds, from either debt deflation or currency inflation would send the price of gold in the underlying currency higher.
King World News note: It is very important to understand what Brodsky is saying in the paragraph below about the problem of higher interest rates in relation to investor portfolios and overall consumption.
The Real Problem With Higher Interest Rates
It is true that higher treasury yields would provide investors with positive carry that gold would not (unless investors choose to lend out gold in return for interest). Lost on investors that succumb to this thinking, however, is that with almost $20 trillion of treasury and agency debt outstanding, rising treasury yields would produce more debt deflation on existing portfolios than higher income from newly issued treasuries would stimulate consumption.