The gold oracle

What a rollercoaster the gold price has performed since Donald Trump was elected US president. We all recall the massive intra-day risk-off on Nov 9, with the S&P futures dumping 5% in Asian trading before lift-off to what is now well-known as the Trump rally, with 10 year Treasury yield plunging 15bp to 1.70% before ascending by close to 100bp, and with the gold price soaring 5% before dropping 16% to the lowest level in 12 months.

It is fair to say markets have kind of balanced out again since then. In fact, they aren’t really moving much these days. Volatility is dead, the S&P keeps creeping higher ever more slowly, and the 10 year rates continue to normalise post that jolt. The pundits are desperately looking for any discrepancies and divergences, but apart from some kind of minor detachment between equity and bond markets they haven’t been able to come up with much.

No one seems to bother about gold. Yes, it had markedly dropped after that Trump election intermezzo, like in a tribute to a quick realisation of Trump allegedly being good for economy and the entire system. But as in a u-turn move it has stealthily rallied back up by almost 10% this year. Why would that be the case, if all other risk markets are still giving the green light on coming Trump policies? It is reflecting a risk-off rather than anything else.

It brings us yet again back to the question of what gold actually stands for. Many still believe that the shiny metal basically serves as a hedge against inflation. With expectations of goods and service price appreciation running wild in the past 3 months, maybe that is in fact the reason why gold has rallied, to hedge against Trump-induced inflation increases? But people, I have never been a buyer of such theory…

If it really was the inflation scare, why would 10 year rates not trade at 3% or higher? To be sure, the long Treasury market is much more dependent on capital flows these days as compared to prevailing macro numbers, but it would have left at least a larger scar in yields than we have seen so far. So, the inflation argument only takes us to a point, and it has long been outdated in any case.

Gold serves one principal purpose in our lives, and I have re-iterated this many times here, namely as a hedge against the demise of the money system as we know it. It wasn’t inflation that drove the price of gold up to above 1,900 dollars in 2011. It was the Fed being tempted into unchartered territories of monetary policy, at least as far as America and Europe were concerned.

Printing money to inject into the financial system was seen to be a last resort to stabilise a situation that Bernanke called being on the verge of tipping into a 1930s scenario. Despite the benefit of Ben having been a historian of the crisis 80 years ago there were no guarantees that his medicine would actually work, but he managed to catch the falling knife of an epic credit implosion in the making. That he deserves credit for.

To have continued his money printing and eventually piling up 4.5 trillion dollars in assets on the Fed balance sheet I am not so sure he needs to be lauded for. Admittedly everybody is smarter in hindsight, but utterly inflating the financial system with liquidity that has hardly found its path into the real economy, and still leaves us with rock-bottom velocity of money, hasn’t exactly been in the eye of the beholder.

There, Bernanke didn’t just act as a central banker. His remit at the height of the crisis was more than that. The health of America’s societal structure was at stake. Next to catching the knife in an economic sense he saw the need for providing the people with a manufactured wealth effect. His policies drove asset prices up, and while the public now bemoans the benefits for the rich it overlooks what this has done to their own 401 pension plans.

And don’t even talk about inflation. While monetarily we inflated like nothing else in modern times, goods price inflation remained low or at times negative. Even 4.5 trillion of extra cash couldn’t rescue the world from its disinflationary cycle that despite the current PPI and CPI twitches I believe we are still in. Once the great wave of commodities short-covering ends, we will have to see how much of real demand the world has to offer.

But back to gold and why its price is climbing. I think the message is that the smart money is seeing through the Trump hype and is eager to lock down their downside from any major disappointments. I am aware that it sounds ludicrous to be as controversial, but there is a chance that we are completely misreading this. What if growth doesn’t come through, what if the labour market shows its real face, what if disinflation continues to rule?

There is one thing for certain. It almost always pays off to listen to gold. And the shiny one is currently sort of telling us that we are all way too complacent, and that there may be a chance for us to go back to an economically weak scenario where monetary policy will have to come into play again, maybe on an equally unprecedented scale as in 2011. We cannot be certain yet, but do yourself favour… follow the gold.