Your regular editor Boaz Shoshan is otherwise incapacitated today. So it falls to your former editor Nickolai Hubble to offer up some words about our favourite subject, cryptocurrencies gold.
The gold price is posed to surge in coming years as the effects of money printing are priced in. But why hasn’t that happened yet? To explain, let me resort to a rather odd metaphor…
Teeterboard is one of the few circus arts I’ve never tried at all. It just happened to be my day off when the rest of my circus team in Phuket decided to dust off the old board and have a go.
I was deeply disappointed to have missed out. Although I suspect my mini-trampoline efforts the day before had influenced the decision to try teeterboard while I wasn’t around…
I got my revenge though. The next day, I was the only one who could walk straight.
A teeterboard, also known as a Korean Plank, is like a see-saw. You stand on one end and watch your friends jump on the other. If you’re unlucky, that’s the last thing you remember. If you’re lucky, you eventually land on your feet, having done something entertaining in between.
The shockwaves that pulse through your body during launch are apparently rather powerful. But you don’t notice them at the time because you’re petrified. The next day, you do notice them.
My short-lived career as a circus arts performer taught me plenty. And, right now, it’s telling me that the gold price is about to fly.
Why?
We’re watching the world’s central bankers take a giant leap of faith with their latest policies. And when they land back in reality, gold is what you’ll find on the other end of the teeterboard. It will soar.
The reason I’m using the odd analogy is simple. There’s a delay in teeterboard. A moment when the “pushers” hit the board, but the “flyer” on the other end hasn’t moved yet. All the tension is in the flex of the board.
That’s where the gold price is, right now, in my view.
While central bankers have been in action to fight off Covid-19, the gold price hasn’t surged by much. This is deeply disappointing to those who assumed the vast bouts of quantitative easing (QE), negative interest rates and deficit financing would send gold to the moon.
But they’re making a simple mistake. You see, gold booms after a crisis, not during one. It booms after central bankers and governments have implemented their mad policies. There’s a delay, just like in teeterboard.
It always works that way for gold. I’ll explain why below. But first, is it true?
Because the gold price is set in US dollars and the global reserve currency is the key, we’ll use their data.
After the stagflation of the mid 70s, the gold price surged from $100 to $870 in 1980.
After the tech bubble of 2000 burst, it surged from $300 to over $1,000 in 2008.
And after the 2008 financial crisis ended, it surged from $700 to $1,920 in 2011.
Those were the three big bull markets. Gold didn’t just protect people from crashes during crises – it subsequently boomed.
There’s a simple reason for this phenomenon. Governments and central banks use a particular tool to paper over crises. They lower interest rates, print money and spend money like there’s no tomorrow. It’s monetary meddling, which is why I call them monetary meddlomaniacs.
During the crisis, the monetary meddling merely offsets the crashes taking place. Or tries to. But after the crisis, the underlying effects of this meddling are exposed. The consequences gradually emerge.
Money printing and financing deficits lowers the value of money – that’s the collateral damage. But this takes time to play out. Especially during a crisis.
The initial effects of printing money often feel quite good. In fact, at first, as we’re experiencing now, money printing inflates asset prices. People think they’re becoming rich and speculative stocks fly.
Most asset price bubbles, which clever economists explain as being caused by “animal spirits”, have a central bank or government policy behind them. That’s where the new money comes from to inflate the bubble in the first place.
But, over time, the economy realises it has been duped. The new wealth is false, like the effects of a drug. And the after-effects begin to appear. That’s when gold surges.
Gold is like an opt-out from the monetary and financial system. In fact, historically, that’s precisely what it was. If you didn’t trust the national currency or the banking system, you went and exchanged your banknotes for gold, as those banknotes legally entitled you to do.
When governments had to devalue their currencies against gold to acknowledge their past monetary meddling, those people who had opted out via gold protected their wealth. They escaped the devaluation.
It may seem like we can’t do that any more, now that we’re off the gold standard. But the same act just looks a little different. We can still buy gold. And the devaluation happens in the form of a gold bull market instead.
A rising value of the opt-out-asset is like a signal that the financial system itself is dodgy. Trust in it is declining. People are opting out. Exactly as you’d expect after money printing.
But it’s not until the aftermath of a crisis, when the supposed recovery is underway, that the knock-on effects of money printing and government spending are exposed. And that’s why the gold price surges then.
If the last three bull markets are anything to go by, once you take into account the current efforts of central banks around the world, we can expect a gold price bull market to surge again in coming years.
Let’s take the world’s most important central bank as an example. After the 2000 tech bubble burst, the Federal Reserve cut interest rates to 1%. And kept them there far too long.
This led to the boom in gold and house prices because money was too “easy” or “loose”.
The 2008 bust saw a return to QE. Which had to be repeated over and over again in subsequent years. And so the gold price surged.
This time, the central bankers have said that they will consider keeping rates low and QE in place until inflation runs above their legally mandated targets.
Gold will boom again.
Nick Hubble
Editor, Southbank Investment Research
Category: Investing in Gold