The gold price has soared beyond the record of US $2,000 per ounce. The rally is so strong that it spilled over to the silver market. Silver rallied from $18 per ounce to $26 per ounce, a 44% rally in a month. Now the questions are, “How high can the price of gold and silver go?” and “Is it too late to buy gold now?”
The flocking to gold investments such as SPDR Gold shares is warranted. We are facing an extremely challenging world. There is no end in sight to the global coronavirus pandemic. Furthermore, the tensions between the US and China are increasing. Therefore, investors have nowhere to hide.
In addition, the world is flooded with so much cheap money that investors are running out of assets to buy. Gold, the traditional “safe haven” in a time of crisis, seems to be the obvious choice.
But wait a minute, have you ever wondered if gold still plays the same traditional role as in the past? Even if it does, are you playing the game the right way? Who is the mastermind controlling the up and down movement of gold prices?
The gold rally is not surprising
The gold rally is hardly any surprise to me, it is just a reflection of the devaluation of the US dollar. In my June article “5 ugly truths of the coming retirement crisis”, I have highlighted that the US is going to play the same old trick of debasing their currency to take advantage of the “global wealth transfer”. So if gold is valued in dollars and the dollar drops, naturally the gold price will rise, in dollar terms.
You can see from the chart below that the US dollar index had a “free fall” from June till now.
But playing the gold game is probably be a bit too late now. I have positioned gold in my clients’ portfolios since January 2019. Yes, it was 2019 when gold was still trading at around $1,200. The trend was just so obvious to me then and it was a much easier investment decision to make than now. Below is the chart I drew for my clients in January 2019.
It doesn’t mean that the price of gold won’t go up. It is just that the money is harder to make now.
Gold is not safe
On the contrary to many people’s beliefs (I used to believe that too), gold is not a safe asset to start with. As much as you are told that gold hedges risks, gold is a risk itself, and a very speculative one.
People are very forgetful. Just like the many property investors who never went through the Asian Financial Crisis, gold lovers today have not experienced the dark years in the past.
Ask the people who bought gold 9 years ago, it was a painful experience as it took more than 9 years for them to “break-even”. If they got into the “gold guarantee” schemes, they may not even get their money back.
I still remember vividly that fateful date of August 23, 2011, when I witnessed the biggest slump of the price of gold from US $1,910 per ounce (an all-time high at that time) to US $1,707 just 3 days later. And the price went all the way down to around $1,050 in the subsequent years.
In a recent article, I explained that the investment information that you receive is often manipulated. You are only told what you want to believe. With the soaring of the gold prices, people are jumping to predict how high the gold price can go. Just google “gold price”, you see articles like:
- Gold Price: $2,000 Smashed, Is $2,500 Next Stop?
- Why Many Analysts See Gold Going As High As $10,000
It sounds like déjà vu.
Do you know that just before the gold crash in August 2011, many analysts said that the gold price would reach $2,500? Standard Chartered bank even predicted on June 14, 2011, that the price of gold could reach $5,000! And the 10-year gold price chart above shows what happened afterward.
Gold and US Dollar are deadly enemies
What people don’t often talk about is that even though the price of gold crashed from a high of $1,910 in 2011, the real death sentence of gold happened in 2013 April. There are many speculations behind the reason for the crash, but I think it all boils down to whether the US wanted to give up its dollar dominance.
If you understand financial history, you may know that Gold and the USD are deadly enemies. The value of Gold to the USD or the USD to Gold is relative. When one goes up, the other goes down.
It is a complex topic and I hope that I can find a time to write an article to expand the discussion in the future. But the conclusion is that if gold prices go up rapidly, the US dollar will go down. It means the US dollar valued assets will be relatively less attractive to investors.
What is valued in USD? The US stocks, US treasuries and US properties.
You need to understand the reason that the US is the most developed country today is that the whole world is willing to accept USD, even if it costs little for the US government to print. For example, if the US needs $100 million worth of crude oil today, they just need to print $100m in cash and transfer it to the Saudis.
- What does the US get? The resources that they can use to pump petrol and improve the economy.
- What do the Saudis get? An IOU that may be potentially accepted by other countries like China in exchange for labour and goods.
What if China no longer accepted the USD that the Saudis have? What if gold is the only thing that countries are willing to accept for international trade in the future? That is the de-dollarization that the world has been talking about for decades.
Last year, I attend a forum titled: “The Path of De-dollarization” and I learned a lot from the keynote speaker Bill White, chairman of the Economic Development and Review Committee at the OECD.
The US has good reason to welcome dollar depreciation, but it will eventually turn into a dollar crisis. The world certainly has a lot of resentment over the use of the dollar for geopolitical gains.
Bill William shared 4 principles to fix the international monetary system.
- A preference for rules over discretion (printing money as and when the Fed likes).
- A preference for fixing over floating (a monetary anchor).
- With something real (gold?) at the core.
- All agents (central banks) forced to adjust to reduce the imbalances.
Will that happen? It is hard to say because it is not a matter of economics but geopolitics. But one thing is for sure, the US doesn’t like it. And it is not a secret that most of the world’s physical gold is stored in the US, even if some of the gold belong to countries, on paper.
There are a lot of things that they can do. When the Germans wanted to repatriate their gold reserves from Paris and New York to help build public “trust and confidence”, they faced a lot of hurdles. It took them 4 years to take back $31 billion of gold.
Let me conclude
From my experiences, when everybody including the man in the street is so sure about an investment thesis, I often find it the most dangerous time to play the game.
Gold is a speculative play at best. I find it hard to comprehend when people are advocating gold investing as a safe haven. In my opinion, if you are really worried, you should just hold cash.
The younger generation may no longer be so emotionally attached to the glittering metal bar as our ancestors. Plus, technology has enabled many alternatives such as cryptocurrencies. Don’t forget China is also very ambitious to replace the US as a reserve currency either through its RMB or their sovereign digital currency, the so-called Digital Currency Electronic Payment (DCEP).
I think it is very hard for the world to go back to the gold standard as things are very different nowadays. It may take a world war for that to happen. The best thing that the US wants to see is a devaluation of the US dollar in the long run so they can write off their deficit but at the same time, they cannot afford to lose the dollar dominance in the world financial system.
I wrote earlier that if you want to invest successfully, you need to pay attention to institutional investors’ moves. From my experience, when it comes to commodity price forecasting, Goldman Sachs is seldom wrong. So when they revised their forecast of the gold price from $2,000 to $2,300 by the next year, I think that is probably an achievable target. But it also means that the upside is very limited and you need to be wary that they can also change the gear without notice, that is what happened in 2013.
The gold cycle will still come and go, if you did not get on the trend earlier, you are going to engage in a brutal fight with many other speculators. Whether you are betting on a dollar deprecation or de-dollarization, don’t forget that you are betting against the most powerful central banks in the world.
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