he US currency is counter-cyclical and has played its role perfectly against the latest geopolitical tensions (trade disputes) and financial instability (the yield on the benchmark 10-year BTP in late august climbed above 3%). The last downturn in the gold price (down 13% from April 2018 to August 2018) occurred in the context of an appreciation of the US dollar ($US ndex is up 8%) along with an attempt to raise rates in the US. This will not last.
The normalisation characterised by the implementation of a monetary policy directed at increasing the federal funds rate while reducing the size of the balance sheet of the US Central Bank has exacerbated this pessimism. This very short term view does not take into account macroeconomic forecasts that anticipate a slowdown in US economic growth (from 2.8% in 2018 to 2% in 2020), a further decline in unemployment rates (from 3.6% in 2018 to 3.5% in 2020) and continued inflationary pressures (at 2.1%).* In such an environment, real interest rates are likely to remain low and gold is expected to rise.
Gold speculative positions,which responded to this unfriendly environment, have strongly contributed to the decline in the gold price; they were up fourfold over the last five months to hit a new record high.** However, they have now reached and exceeded technical levels that have, in the past, triggered a trend reversal. This trend reversal is already happening: how can one otherwise explain that gold miners ETFs have collected at a rate of plus 40% since the beginning of the year, while in the same time frame physical gold has depreciated? One plausible explanation: retail investors are throwing in the towel while Institutional money is positioning for the next bull phase. It would be a mistake to underestimate the recurring remarks of Donald Trump’s economic adviser (Larry Kudlow) or Donald Trump himself viewing the Fed’s monetary policy as not helpful. After all, who ever won a trade war with a strong currency? Jerome Powell himself in Jackson Hole stated: “As the most recent FOMC statement indicates, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate”. *** The ‘if’ is key in this sentence while inflation is gathering momentum.
History tells us that in an economic environment characterised by increasing twin deficits (the federal deficit reached $532 billion so far in the 2018 fiscal year, up from $385 billion in April), **** persistent inflation and high debt levels (total public debt as a percentage of gross domestic product stood at 105%), **** real rates remain low and the US dollar depreciates. We are now in this configuration and history is repeating itself. Investors today are very pessimistic about gold; they have lost sight of the big picture. This is the second opportunity in this bull cycle to buy gold miners at depressed levels. It takes courage to step in when the consensus is negative. But this has very often proved to be the right configuration to deliver a positive investment return. As Benjamin Graham famously wrote: “the intelligent investor is a realist who sells to optimists and buys from pessimists.” ****** It is time to buy from pessimists.
* FOMC projections materials, June 2018
** Gold non-commercial short contracts, Bloomberg, August 21, 2018,
*** Monetary policy in a changing economy, Jerome H. Powell, Jackson Hole, Wyoming, August 2018
**** Treasury Department, May 2018
***** Federal Reserve Bank of St. Louis, Q1 2018
****** Benjamin Graham, The Intelligent Investor