A Buyer’s Caveat

If the Gold market was a truly free and logical market, there would be a strong and consistent correlation between geo-political events and the rise and fall of the Gold price

As most of our readers are aware, the price of Gold is currently based on paper trading in Gold, not the buying or selling of ounces in the real Physical products.

So, for example, the price may go down because several financial institutions are selling their paper certificates, while many other investors are buying physical Gold, precisely because the “price” set by the paper has momentarily fallen.

That said, the price of both paper and physical Gold is a measure of the lack of confidence in four things;

  1. Stock markets
  2. Central governments
  3. Fiat currencies
  4. The banking system

So, we should expect to see some correlation but not necessarily a consistently logical one, because other factors have long been argued to be in play.

Gold Prices for the Last Year mapped against Geo-Political Events

A graph showing the cost of gold mapped against key Geo-Political Events from the past year

 

1) E.C.B. announces further Quantitative Easing & cuts interest rates further into negative

When the European Central Bank produced even more “printed” money the financial markets showed, as before, a false sense of confidence. So, we would expect to see the price of Gold fall for a short period after such an announcement. This is what happened – a good buying opportunity.

But, in the long run, Quantitative Easing is not a sign of confidence in a healthy market. It is a government intervention to stimulate a struggling economy by pumping more “created” money into it. So, although we would expect to see a short fall in the price of Gold, we would also expect to see such an announcement add a stronger pressure for the price of Gold to rise against fiat currencies in the long term. Which is what has happened.

 

The outside of the European Central Bank in Frankfurt

 

2) Venezuela Economic Collapse Hits Mainstream News

Any news of a country in economic collapse should put pressure on the price of Gold to rise. This is because Gold, as noted above, is a measure of confidence in the fiat currency system.

The closer other countries perceive that country’s collapse to be to their own, the more the price of Gold should rise. Venezuela’s economic collapse is also partly caused by a heavily socialist government. So, that acts as a slight buffer to the market perception i.e. “This couldn’t happen in our economy because we govern differently.” Not completely convinced by this mental argument? The markets proved they also weren’t. What followed was a short fairly sharp rise in the price of Gold.

 

A Venezuela flag blowing in the wind against a stormy sky

 

3) Italian Banking Collapse Hits Mainstream News

So, surely, this news would have moved Gold up sharply. After all, Italy’s economy is the third largest in the eurozone and proof that the eurozone is very broken. “Western European banks have more than doubled their holdings of their own governments’ debt from a low of €355bn in September 2008 to €791bn today.” (The Telegraph, 21 June 2016) Otherwise known in economic circles as ‘the Doom Loop.’

But, most surprisingly for a supposedly free market product, the price of Gold instead went sharply down. Some savvy commentators surmised that this was so as not to alert the soon-to-be voting British public on the ill health of the E.U. single market before the E.U. Referendum vote.

 

Leaning Tower of Pisa in Italy against a red sky

 

4) E.U. Referendum Result in the U.K.

Change and uncertainty is frightening, not invigorating, to many people, especially if we have been told over and over again that that particular change will be damaging. So, it is of no surprise that the E.U. Referendum result of 52% to 48% to vote to leave the E.U. caused a sharp and sustained rise in the price of Gold. Especially as the centre of U.K. Gold trading is the city of London and it was the metropolitan bubble of London that predominantly voted to remain. This rise in Gold is proof that we – given enough fuel – can scare ourselves silly.

If the vote had gone the other way, the price of Gold would probably have been punished hard, especially in the short term.

Yet, in both scenarios, none of the ill-health of the eurozone or size of the previous quantitative easing would have changed. It is an irony. The price rise was purely based on perception.

 

Both United Kingdom and European Union flags emerging from one another

 

5) Germany’s Deutsche Bank & Spain’s Santander Bank both fail stress tests

The largest bank in the largest economy in the eurozone failing a stress test was big financial news. As expected, it moved the Gold price rise into third gear and took the price to heights not yet again reached.

 

The external building of Germany’s Deutsche Bank

 

6) Bank of England Lowers Interest Rates & begins additional monetary stimulus package

Designed to calm a frenzy of post E.U. Referendum worry going on in the British media and public, this announcement didn’t immediately calm the markets but took a few weeks to sink in. Then, the reality of lower interest rates on the monthly family budget began to trickle through. The following month of August clocked the highest percentage rise in re-mortgaging that year. This news saddened me because a quarter percentage interest fall does not a recovery make and the housing market is currently in a bubble.

But, when interest rates fall, more investors move into Gold. The rational is that if the banking system doesn’t pay you to put your money there, it becomes even more attractive to park one’s wealth in Gold.

So, as expected, there was an immediate rise in the price of Gold as more moved in but then a longer slower fall, as the general public and markets moved deeper into re-mortgage and extended debt.

The pure irony is that the Bank of England didn’t just announce a fall in the interest rate. They simultaneously announced more quantitative easing. This means more inflation in the long run. So, the two moves together are very much like giving Joe Public a little savings in one hand this week but taking out much more from the other hand over the coming months.

It is not surprising to see the financial truth of this sink in, in the opposite oscillations of the price of Gold over the following few months; a dichotomy of give and take, push and pull, reflecting perfectly as the two sides of the same coin, excuse the pun.

 

The external building of The Bank of England in London

 

7) U.S. Presidential Election Result

This is so often an emotive subject. So, looking at this purely logically, if a candidate ran a campaign on economic infrastructure investment and building grass roots industry, one would expect the markets to gain confidence from that, causing a fall in the price of Gold.

But, looking at the surprise of the result to many in the media and around the world, one would also logically expect an immediate rise in the price of Gold following the results, as that surprise hit the markets, followed by the above reaction to the economic policy of the candidate sinking in. That is exactly what happened to the price of Gold. In fact, after a very short sharp rise, the price of Gold continued to fall over the next two months.

 

Presidential election finalists are Donald Trump and Hillary Clinton

 

8) India Withdraws Currency Notes

The only reason it can be surmised that this news didn’t seem to cause a concurrent rise in the price of Gold was that it was deeply hidden behind the above headline-grabbing event. It happened on exactly the same day as the U.S. Election results. 

To put into perspective, India is the world’s seventh largest economy, one of G20’s major economies, classified as a newly industrialised economic nation and has attained economic growth of 7% for the last two decades. The withdrawal of several of their larger currency notes entirely overnight is massive financial news. Yet it barely broke the surface of the media.

It also didn’t affect the price of Gold in GBP. But a truer picture is seen when looking at life on the ground in India. Overnight, the price of physical Gold passing hands rose by 15-20%.

 

A pile of Indian currency notes

 

9) Federal Reserve Raises Interest Rates

As previously discussed, a rise in interest rates tend to push the gold price down, as mainstream investors believe their money will gain more now parked in the banking system. True to perception, this announcement added extra down-pressure on the price of Gold from the previous month and the price continued to fall. Another good buying opportunity.

But this down-push didn’t last long. Once again, the gold price started to rise again within a week.

Remember, this graph is a reaction to headlines and not a deeper stance upon the base notes of the overall weakness of the global economy. I can only guess that after the initial honeymoon, the logic of the world’s gold investors kicked right back in – in recognition that nothing’s really changed in the ill-health of the U.S. economy.

After all, an interest rate rise by the Fed was heavily argued to be a counter-political move against Trump. If interest rates rise too fast the U.S. government won’t be able to service their international debt. Whichever party is in office when that happens, regardless of which party created the debt, will suffer heavily.

 

The external building of the Federal Reserve Bank in America

 

10) O.E.C.D. Warn of Property Crash in U.K., Canada & Sweden prices “dangerously high.”

This point perfectly highlights the inverse correlation between the two asset classes of property vs. gold. Historically, as house prices enter a bull market, Gold enters a bear market and vice versa. Mike Maloney explores this beautifully in his book “Guide to Investing in Gold & Silver: Protect Your Financial Future.” 

Needless to say, this warning did exactly what was expected; it pushed the price of Gold up, after a fairly long fall in price, as if some were woken from their financial slumber of recent months. This pattern within the housing market has been seen before in 2007, just before the 2008 property and market crash. 100% mortgages have now returned, just as they did pre-2008.

 

A property crash in UK, Canada and Sweden could be coming

 

11) British Prime Minister Gives Key Speech on U.K.’s withdrawal from the E.U.

Remember, many people don’t like change. This speech gave direction to the media and the markets. But something truly perceptive happened. Both the stock market and the gold price rose. Intrinsically, these two markets usually work in inverse, not in parallel. 

This shows that it is possible to have a short term calming effect but also to acknowledge that the world’s markets are still in economic trouble and have been since 2008. The markets perceived these two currents and that one has nothing to do with Brexit. 

 

12) Inauguration of the 45th President of the U.S.

As point #7 above states, based on policy, Trump’s inauguration was a repeat of the two months after the election result. The price of Gold fell as the markets took root in his campaign promises of increased infrastructure investment and focus on grass roots industry.

But, as previously explored in Bleyer’s blogs, the U.S. is currently $20 trillion in debt, so it is doubtful that any one administration could ever haul the world’s largest economy out of such a downward spiral. The price therefore falls after this event. But then true to form begins to creep up again in the following months. 

 

Trump’s inauguration two months after the election result

 

Conclusion

In many ways, the price moves in Gold keep reflecting this tension between the headlines and the underlining truth that the world’s fiat economies are in trouble. Headlines block out the base notes but not for long.

To own your own Physical Gold – and Silver – as a long term wealth protector visit Bleyer’s website or call one of the office team on 01769 618618.

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