In December I wrote that I believed 2020 was going to be another strong year for New Zealand Dollar priced gold, and as yet I haven’t been disappointed.
From a market close at Christmas 2019 of $2245/oz gold to the time of writing, gold has just pushed through $2633/oz (up 17.2% as at 24/2/2020). Back in December the world had no inkling that a virulent virus would take hold in the worlds second largest economy and disrupt production and distribution of global goods. The rise in gold has reflected market uncertainties, and after six weeks of trying to contain Coronavirus the sharp rise in the gold price suggests the World Health Organisation is failing to contain its spread. The big fear is this will throw the global economy into a significant recession, and no amount of money printing is going to reduce the public’s fear of contracting such a contagious virus.
We do expect prices to ease, and some profit taking to ensue, however this will be limited if the virus spreads and cannot be contained.
Where to from here?
The big players in the precious metal markets published their predictions in February. One forecast I encourage you to read is MKS PAMP 2020 by my friend Frederic Panizzutti. My personal opinion is that we could see gold reach NZD$2800 and silver NZD $31.00. The movements will be in two or three stages with profit taking in between.
2020 will be about political uncertainty (again), increasing economic/political troubles in Europe and how the flow of large capital into the US will strengthen the US Dollar and find sanctuary in US Dollar dominated assets. The global economy was struggling for growth, and now the Coronavirus is pushing the world into a global recession. Central banks that can buy debt will do so to inject yet more ‘money’ into a system, that has no hope of repaying it … Is what we are seeing reflected in the gold price an indication of a return to a gold standard in the future?
It reminds me of John Nash’s Equilibrium Game Theory.
Adam Smith, the father of modern economics, said the best results come from everyone in the group doing what’s best for themselves. If the group is made up of countries, the country with the lower exchange rate will have an advantage in price when exporting to other nations, this produces a competitive downward spiral of currency which in turn raises asset prices, as the currency now has a lesser value.
What Nash realised is that the most benefit would come from looking at what is best for the individual and the group.
Say having a lower currency was your first choice, but by doing so, other nations would look to do the same thing so they could compete, this option would not take into account what is best for the group. What is best for the group is no manipulated currencies, one way to achieve this is to peg all currencies against gold. Yearly gold production increases are in line with global GDP growth, making it a good contender. So, if no country got their first choice, but did what was best for the group, all countries would compete on the merit of its products and services, and we would have one less reason for money expansion and by extension rising asset values.
The current position is no country knows what any currency is worth as it is reflected against a basket of currencies. If they were priced against gold, there would be a cost to increasing your money supply and you would either have to increase your gold holdings or get your balance of payments in order to maintain the peg.
So my best advice to the year, if you already have gold – you will be smiling, if you want gold – keep watching and buy in the dips. I believe we are looking at many years of gold price appreciation, and just remember in 2008 gold was at USD$1990 before dropping to USD$1660 which just happens to be where the USD price is as I write.
If you haven’t already done so, it really is time to start taking gold seriously.
In gold we trust