Blain’s Morning Porridge – Jan 26th 2023: Buy Gold to fund Bottom Fishing!
“Gold is enough, Beautiful gold, Lovable gold, Spendable gold..….”
This morning: Gold – can’t eat it, can’t use it, but its everything crypto never was: tangible, exchangeable, a store of value, and a kitty for when things get tough. In uncertain markets…. Don’t forget the yellow stuff.
Writing the morning porridge after Burn’s Night, Scotland’s celebration of our acclaimed national poet, Robert Burns, following Whisky and Haggis is never easy… So in order to force my brain back into motion… let’s consider Gold!
Trying putting Gold in the context of today’s markets…. So foul and fair a market I have not seen. (Extra points if you know the reference from the Scottish Play – and what happens next!)
- One hand we have a pandemic of optimism that inflation is broken, central banks are going to pivot and start cutting rates, thus its unbounded joy at the prospect of a minor downturn, recovery, growth and a swift rise in earnings pushing up stocks, while bonds rally into the ease. The China reopening will fuel global recovery. Put your buying boots on!
- On the other hand are the ongoing portents of sticky inflation, central banks wanting to normalise positive interest rates around 2% inflation and 4% rates to promote functional capitalism (the end of the era of cheap money), and the shake-out in Zombie, over-levered companies and speculative hype that’s driven financial asset price inflation and now blocks growth and productivity gains. Stabilising the global economy will see rates and inflation higher for longer.
- Then layer on the real-world challenges of War In Ukraine, Geopolitical threats, Energy Security, the consumer Cost of Living Crisis and Income Inequality, climate change, plus a host of immediate challenges emerging to the political order in the West; from failing services across health, housing, education to increased populist threats from Left and Right.
Pick yer poison and lay yer bets accordingly.
Markets work by reading the uncertain runes of unclear futures. There are threats out there – but outcomes probably fall into the middle. My classic mantra is: “Things are never as bad as you fear, but never as good as you hope.” I see markets as multi-dimensional and complex: a little bit of inflation here will have consequences way over there. Be aware of the complexity.
Many market participants tend to make the mistake of thinking price moves are determined by the linear cause and effect of events – this morning I read on Bloomberg: “High Equity Yields act as a better hedge against higher inflation than fixed income.” That is linearly true, but higher interest rates have consequential lateral effects; reducing consumption thus putting corporate earnings under stress and long-term less sustainable.
Nothing in markets is ever simple…. Think laterally. Which finally leads us to Gold and its place in uncertain markets.
According to the chart I was looking at, Gold prices peaked in 1980 at $2500 on an inflation adjusted basis. On a price basis the current price of Gild ($1945) is pretty close to the $1971 price seen during the depth of Covid.
My colleague Ashley Boolell, Shard’s head of commodities, reckons gold is going to a new record level this year, fuelled by a number of factors – not least being the ongoing market uncertainty. Each time we get another unexpected market number, or a corporate shock, it chips way confidence. In uncertain markets Gold is seen as the safe-haven investment – especially when there is the threat of the technical US default on the back of the debt-ceiling being blocked by the Alt-Right of the Republican Party.
Gold pays no interest. There is no return. It has no real use. Gold’s value is its scarcity.
It is formed in supernovas and neutron stars in Galaxies far, far away. All the gold on earth came arrived as space rubble and dust, absorbed as the planet coalesced in the clouds of material around the forming sun. All the gold that’s ever been mined would only just cover a football pitch to the depth of 1 meter. (205,238 tonnes over the entirety of human history according to the World Gold Council.) Aside from some very limited industrial catalyst applications, its not very useful, but because it does not react or tarnish – it’s been worshipped as a thing of value for millennia.
I was once told the prime driver of gold prices is the Monsoon. In wet years Indian farmers get rich on improved crop yields – meaning they buy their daughters more gold bangles for their wedding dowry. It’s a lovely thought – but apparently an exaggeration.
Unlike cryptocurrencies – which tried to push their way into finance as exchangeable stores of value despite their intangibility – gold’s tangibility as a store of value has made it the globally accepted token of wealth since year dot. Over the years it has morphed into a commodity in its own right – traded electronically and held as an investment because of its recognised store of value.
In times of uncertainty gold tends to rise. In times of market uncertainty it’s a very useful asset to hold. The trick to a market sell off is not being short equities when the stock crash comes, but being liquid enough to start buying after the crash or market correction. Analyse any great market tumble and its inevitably followed by a buying window – that delicious moment when the rest of the market is still panicked and fearful, but stock yields look cheap and bonds are selling for pennies because of weakness. That’s the moment to buy – but what with if your liquid bonds are in free-fall and offered only, and stocks are still in free-fall.
That’s when the liquidity of Gold is a marvellous thing. Going into market uncertainty with a nice little stash of gold to finance bottom fishing of distressed cheap assets is a marvellous thing!
Funny moment yesterday when I was chatting to Ashley about Gold y’day. Aside from being our commodities guru, he is also a published Science Fiction author. I asked him about the implications of space mining – which will be a very real thing in the next 50-years. What if a mission to the asteroid belt discovers a 10,000 tonne lump of orbiting gold? (I remember something like that from E Doc Smith’s Lensman series). Ashley told me that’s exactly what he’s writing about now!
Five Things to Read This Morning
BBerg Adani’s US Dollar Bonds Fall After Report by Short Seller
FT Morgan Stanley hits bankers with $1 mm penalties for messaging breaches
WSJ Tesla Warns of Uncertainties as It Posts Record Profit
ZH Tesla “Weaponises” Price-Cuts to Crush EV Competition
Torygraph Britain is on the brink of becoming an economic basket case
Out of time, and back to the day job
Strategist – Shard Capital
The only useful commodity forecast made by the witches was the Dunsinane lumber glut.
extra points awarded…
I forgot to add in this morning’s gold comment that as the dollar weakens then gold becomes even more relatively attractive, pushing up the price. As the dollar will weaken if rates are cut, or on some inherent stupidity like in Congress, its another upside leg for Gold.
The Gold price is very close to all time highs in sterling terms. If the dollar weakens against Sterling the Gold price falls in Sterling terms for Sterling based investors. A falling GBP Gold price will of course make it more attractive to buy but if the trend continues they’re fighting a rising spot cable. I’m not forecasting this just pointing out the dynamics are different depending on your base currency.
You’re in good company, this bit from the IMF., via Market Watch.
“Central banks are stocking up.
Three economists—Serkan Arslanalp and Chima Simpson-Bell at the International Monetary Fund, and Barry Eichengreen at UC Berkeley—have published a new report pointing out that gold, far from being on the way out as an international reserve currency, has been coming back in.
“Central bank gold holdings have risen since the Global Financial Crisis (of 2008-9),” they write. Central banks have been stockpiling bullion over the past 15 years, more than making up for the net sales of the previous decade. Central banks worldwide bought more gold in the third quarter of 2022 than in any other quarter in 55 years, they report.
No, really. Fifty-five years.
The buyers have been the so-called emerging, developing (and, sometimes, ‘submerging’) countries such as Russia, China, India, Turkey, Argentina, Hungary and Belarus. Some 14 of them have hiked gold as a share of their reserves by more than 5 percentage points so far this millennium, the economists report.”
But wait…there’s more. This from today’s WSJ:
Gold Prices Buoyed by Rally as Investors Get on Board
Most-actively traded futures contract rises about 20% from September low
Gold purchases by everyone from central banks to institutions and ordinary investors have lifted the precious metal in 12 of the past 16 sessions, according to Dow Jones Market Data.
The most-actively traded gold futures contract has climbed about 20% from its September low to above $1,940 an ounce—its highest level since April 2022. Prices are poised to gain for the sixth consecutive week, which would mark the longest weekly winning streak since the nine-week run that carried gold to a record of $2,069.40 in August 2020.
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