NEW TOWN, EDINBURGH – “Is this a big problem for us?” asks a reader.
They point to a topic discussed during our recent Gold Summit:
In your [Gold] Summit discussion with Eoin [Treacy], you predicted a substantial fall in the dollar index — and you aren’t the only people to say that this is something the Fed wants to see. Although the dollar index reflects many currencies, such a fall would inevitably affect the dollar/sterling relationship. As gold is priced in dollars, and sterling would rise against a falling dollar, the rise that many people (especially at SBR) are expecting in the dollar price of gold will necessarily be lessened for UK investors pricing it in sterling.
Is this a big problem for us? Would the circumstances that are predicting a fall in the dollar also create an even larger rise in the gold price, such that UK investors would still see most of the benefit? Or will this really be a play that’s only good for Americans and others whose currencies are pegged to a falling dollar? Can you please discuss this in one of your articles?
You are right to point out that a rise in the dollar price of gold does not necessarily mean the price of gold in sterling will rise also. The same applies to any pair of currencies which “float” – that is, which trade freely in the currency market and are not pegged by their respective governments.
However, the dollar’s role as global reserve currency makes it exceptional. As the dollar dominates commodity markets (not to mention pretty much all other major markets) a strong bid for gold in dollars – the largest global currency there is – can push the price of the metal up across the board. The world looks to the dollar price of oil as the price which sets the trend, even if our own respective currencies may offset the moves locally. The same is true of gold. That’s why I focus mainly on the USD price of gold (which is set in London, funnily enough) – even though I’m a Brit, living in Britain.
One should remember that the inflation of the 1970s was felt all around the world, but it began with the inflation of the US dollar. While the USD would strengthen and weaken against individual currencies over the course of the decade to come (as the post WWII currency system known as Bretton Woods fell apart), it ignited a bull market in gold that could be observed in all currencies.
The USD is no less ingrained in the global economy today; indeed, it is more so. So I expect a strong fall in the value of the dollar today would create a similar global inflationary impulse – even if smaller currencies like our own would appear to be rising in value against in the USD in the nearer term!
It’s worth noting that while the past decade has not always been friendly to gold in dollar terms, if one looks at the gold price in other currencies – like yen, the Indian rupee, and Aussie dollar to name just a few – the bear market of the early to mid 2010s wasn’t nearly so harsh. In this way, the US dollar is one of the last pillars holding down the gold price.
Meanwhile, more readers keep writing in with either applause or concern at my decision to dump my entire company pension into the gold mining sector…
I admire your nerve; but… seriously, please do not put all your eggs in one basket. Spread a few yolks in other pots for peace of mind.
Having said all that I think gold is ready for a bit of a lift, but so is everything else. And you are obviously young enough to regain any losses over the years.
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“No one ever made it big by thinking small” (Jimmy Nail)
I can see your logic with your pension fund – good luck!
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As long as you are comfortable that non-essential mining will never get banned as it is “dirty” you can sleep OK. I see that certain [gold mining] companies like Centamin for example are able to offset by building Solar for power but they are in sunny Egypt.
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I think you’ve made an excellent decision as it’s only part of your overall strategy. I’m 74 and have both gold/miners and Bitcoin. Good luck.
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And this reader reckons I’ll get robbed right before retirement, when asteroid mining floods the market with the gold of the cosmos…
Putting all your Southbank Research pension money into gold does seem a gamble. If you are today, say, 27 and you expect to draw your Southbank pension at, say, 70 (even if you do not actually stop work) then that gives 43 years of pension accumulation. And the pot could indeed be almighty great. A thought though! What if the bottom drops out of the gold price just before you wish to collect your pension?
How could the gold price suddenly drop dramatically in around 40 years’ time, or even before that? Well, consider that marvel called asteroid mining. What if by then – and the asteroid development schedule seems just about right – the return of untold quantities of gold from asteroids floods the earth’s existing gold reserves and collapses the gold price? You must have thought about this, Boaz, even though you likely started your pension scheme only a year or two before mining asteroids was even discussed.
Inclined to think that you need to consider making better use of your Southbank pension money. Either that, or keep a beady eye an Elon Musk et al and their asteroid mining efforts and cash-in before they even indicate that they can at the technical level ship boatloads of the stuff back to Blighty.
I reckon asteroid mining is a way off – but then, so are my prospects of retirement. While I’m no expert however, I think the price of gold would need to rise considerably before any such gold extraction could become feasible. And as such operations would require an awful lot of planning (and would attract a similar amount of press) I’d have plenty of warning time. Maybe once the first mining rocket is launched, I’ll sell – but I think we’re a way off yet…
All the best,
Boaz Shoshan
Editor, Capital & Conflict
PS We’ll be taking a closer look at the chaos in the crypto market in tomorrow’s letter – but before we get to that, take a look at this.
Category: Investing in Gold