Echler Solomon Feng

esfpm.com
Oct 17, 2018

Back to Gold

Now that global markets are faltering in a long-expected correction [or could it be something more serious?] we are compelled to look into that old but reliable refuge for asset protection; that classic historical safe heaven against financial turmoil – gold.

Over the past few weeks, we’ve heard good things about that shiny yellow ore - from technical breakouts to fundamental improvements. We’ve noticed too that since the start of 2018, we’ve had the central banks of China, Russia and even Kazakhstan and Poland as the principal buyers of gold. With markets in a tailspin, economic & political ‘noise’ coming from different fronts, can we, after so many false dawns, bet again on a sustained & rising gold price?

We have often wondered how the equities market continued for so long in what is now the longest Bull Run in US history – without overheating. In the meantime, gold has been regarded as the stepchild of the financial markets for at least the past six years since the yellow metal peaked in 2011. There are now talks of a significant reversal and shifting to gold assets – with many seasoned market observers becoming bullish.

Of course, the revelation that the central banks of China, Russia, Kazakhstan and Poland were behind this year’s bulk purchase of a stunning 264 metric tons (or some 9.3 million ounces) at relatively depressed prices has left speculators to believe that these governments are positioning themselves for what may happen in the future – a crashing equities market or a soaring gold price, or both perhaps.

Whatever is happening in the financial markets, we can first thank the subliminal fear of a return of rising inflation to the US economy brought about by input costs and unexpected aggressive accelerated wage growth. Gold has always been a safe hedge against inflation. With a 4.2% GDP growth rate in the second quarter, it was just a matter of time to see rising prices as a byproduct of growth.

Also, we can thank Jeff Bezos over at Amazon for adding fuel to the flame when he agreed to give his 250,000 workers a 25% pay increase from US$12 to US$15. By doing so, he has created pressure on employers like McDonalds, Target and Walmart to follow suit or else they will lose their employees. This increase further adds to a push on wage inflation.

Of course, you might argue that gold could not prosper with a rising interest rate environment, with the Fed essentially promising four more 25 basis points to take the overnight rate to 3.25%. But what happens when the rate hikes stop? Will gold have a run up to catch up? With rising inflation and rising rates, it is inflation that investors fear the most.

With a number of fundamental factors coming into play, it’s just a matter of time that these will all have a long-term positive influence on that precious yellow metal. Like bulls swarming in to take that last ounce in the market, we will see its demand accelerate before you can even notice it.

There is one fundamental reason why we see an acceleration in demand amidst all of these positive fundamental improvements: there is just no supply anymore. All those charts point that new gold discoveries are in free fall. Why so? Because falling prices from 2011 to 2018 caused exploration budgets to be cut and operations to cease. As the law of supply and demand dictates, it will be just a matter of time before the price of gold catches up.

Gold has not really lost its lustre, as far as demand is concerned. Maybe there is a reason why central banks have been accumulating the precious metal quietly at depressed prices. Long favour for gold never went away. Some just might want to make it stay low so as to buy it low, without alerting or agitating the market for it.