From Birch Gold Group:
It is generally well known in economic circles and in the general public that precious metals, including gold, tend to be the go-to investment during times of fiscal uncertainty. There is a good reason for this. Precious metals have foundation qualities that provide trade stability; these include inherent rarity (rather than artificially engineered rarity such as that associated with cryptocurrencies), tangibility (you can hold gold in your hand, and it is relatively difficult to destroy), and precious metals are easy to trade. Unless you are attempting to make transactions overseas, or in denominations of billions of dollars, precious metals are the most versatile, tangible trading platform in existence.
…Despite predictions by mainstream economic naysayers, gold has not collapsed back down to pre-crash levels. In fact, gold has remained one of the most effective investment performers for years.
The question is, what happens next? Setting aside gold confiscation as a factor (a factor which I believe would be impossible to enforce in today’s markets), we can see that massive fiat stimulus as a means to artificially support a deflationary fiscal system, as well as central bank intervention in general, leads to collapse and a flight to hard assets like gold. Even with rising interest rates and the potential for a spike in the dollar index, if the rest of the economy is in steep decline, investors and others will still turn towards precious metals.
As I have mentioned in previous articles, the initial reaction of gold prices to faster interest rate hikes may be negative. That said, I do not believe gold will drop as dramatically as mainstream economists expect. Once higher interest rates kill the stock market bubble as well as the renewed housing and credit bubble, gold will skyrocket as one of the only asset classes with tangible real world value.
Readers will know that I’m of the view that we’re closing in on the end of cycle event, does that mean you should hold gold now?
Gold is never more nor less than an alternative reserve currency. That means it’s trajectories are overwhelmingly set by the US dollar. So to use gold as a safe haven over the cycle you need also to understand where the USD is going.
That said, over the very long term you might simply see gold as permanent hedge against fiat but that’s too long to be useful in my book. After all, in the long run, we’re all dead.
So, when should one buy gold as a useful cyclical hedge? It’s when the USD is falling so let’s run through the scenarios.
- Trade wars: gold could be useful to hedge the political fallout in the early days. Certainly every time Trump tweets the USD falls. But, US-led trade wars are inflationary for it and deflationary for elsewhere so they are USD bullish as well. Moreover, if US tariffs turn into a global trade war then equities are likely to slump and the USD be bid strongly.
- This last point matters a great deal. Gold is the worst “safe haven” asset amid global financial crises. This is because the the $11tr of USD funding loans to the world economy repatriates violently during shocks, sending the USD straight up. This is what we saw during the GFC and there are reasons to think that the USD shortage will be even worse next time as forex swap lines between the Fed and other central banks are more controlled now.
- This is the time to buy gold, as it tumbles during the crisis. It then becomes a safe haven as the US Fed devalues its way into a new business cycle and the USD tumbles again.
In short, don’t buy gold yet. Buy it when the MSM is telling everyone that it is a failed safe haven during crisis.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.